Bloomberg News

Yen Debt Beats Global Peers as Quake Bonds Curbed: Japan Credit

October 20, 2011

Oct. 21 (Bloomberg) -- For the first time in four months Japan’s bonds are outperforming the global sovereign debt market as the government will borrow less than forecast to pay for earthquake rebuilding.

Japanese debentures are little changed in October, compared with a loss of 0.7 percent for federal debt of all nations, according to the Bank of America Merrill Lynch indexes. The last time investors lost money holding Japanese debt was in February, when the market fell 0.13 percent. Demand at a sale of 20-year securities yesterday was the strongest in five months, while the average yield was about the lowest in a year.

The government will sell about 800 billion yen ($10.4 billion) of additional bonds to fund reconstruction from the March 11 quake, according to the Ministry of Finance. That’s less than half the amount primary dealers expected, and may ease concern about how much Japan will add to a debt burden that’s already the world’s largest.

“The finance ministry always does what it can to avoid roiling the bond market,” said Akitsugu Bandou, a senior economist in Tokyo at Okasan Securities Co., one of the 25 primary dealers obliged to bid at government debt sales. “Though there may be an occasional sell off when bond prices rise too high, any rise in super-long yields will attract buying.”

Auction Bids

Yesterday’s auction drew bids valued at 3.57 times the amount offered, the highest ratio since a sale in May. The average yield was 1.7555 percent, little changed from a sale last month, when the rate was the lowest since August 2010.

The extra sales will bring the amount of debt sold to investors, such as banks and life insurers, to a record 145.7 trillion yen. The initial plan for the business year, which began April 1, was 144.9 trillion yen.

Starting from Nov. 29, the government will add 100 billion yen to each monthly auction of debt maturing in two and five years. The ministry currently sells 2.6 trillion yen in two-year notes and 2.4 trillion yen in five-year notes every month.

Estimates of the extra issuance from analysts at UBS AG, Mizuho Securities Co. and Nomura Securities Co. ranged between 1.2 trillion yen and 2.4 trillion yen. Primary dealers expected 2 trillion yen of additional sales, a ministry official said on Oct. 13 after a meeting with the companies.

The ruling Democratic Party of Japan said last month it planned to raise 9.2 trillion yen through temporary tax increases and the sale of the government’s stake in Japan Tobacco Inc. Japanese Prime Minister Yoshihiko Noda approved today a 12.1 trillion yen third supplementary budget to fund rebuilding, following two packages totaling 6 trillion yen for quake relief.

Yen Measures

The third budget includes 2 trillion yen to help companies cope with the yen’s appreciation. Japan’s currency has soared 11 percent in the past six months, the most among 10 developed nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

The yen tends to appreciate during economic and financial turmoil because Japan’s current account surplus makes it less reliant on foreign capital. Currency gains have hurt the overseas competitiveness of Japanese companies, curtailing an export-led economic recovery.

The yield on Japan’s 10-year notes rose 0.5 basis point to 1.01 percent today, about even with Switzerland’s for the lowest among developed bond markets tracked by Bloomberg. The extra yield investors demand to hold debt due in 20 years instead of 10 years was 77 basis points, the most since Sept. 12. Japanese bond returns total 1.7 percent for the year, the Bank of America Merrill Lynch indexes show.

Corporate Spreads

The extra yield investors demand to own Japan’s corporate bonds rather than government debt reached 83 basis points yesterday, the highest since February 2009, according to an index compiled by Nomura Securities Co.

Credit-default swaps tied to debt were at 123 basis points yesterday, CMA prices in New York show. That translates into a 9.4 percent chance for the nation’s nonpayment, according to Bloomberg calculations.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements. CMA is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bond Volatility

Europe’s debt crisis in Europe has helped maintain demand for Japanese bonds as a haven. The volatility of Japan’s bonds based on a 60-day reading was 25, compared with 69 for Treasuries and 60 for Germany’s debt, Bloomberg data show.

Officials in Europe are seeking to bolster the 440 billion- euro ($607 billion) bailout fund to stem contagion from a debt crisis that started in Greece in May 2010.

“Japan’s bond market is seemingly a forgotten market because of its low volatility,” said Ayako Sera, a market strategist in Tokyo at Sumitomo Trust & Banking Co., which manages the equivalent of $326 billion. “I don’t think Europe’s problems will be resolved anytime soon, so Japan’s government bonds will continue to receive funds in a flight to quality.”

--With assistance from Wes Goodman and Kristine Aquino in Singapore. Editors: Rocky Swift, Brian Fowler

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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