apan's Bonds Fall for 4th Year, Longest Slide in Two Decades
Dec. 29 (Bloomberg) -- Japanese bonds fell for a fourth year after the Bank of Japan's decision to raise borrowing costs in July spurred speculation that the economy is strong enough to withstand a series of interest-rate increases.
Ten-year bond yields climbed 20.5 basis points this year, the biggest jump since 2003, on concern record industrial production and the lowest jobless rate in eight years will convince the central bank to raise rates next month. Bonds may keep falling in the first quarter as the economy extends its longest expansion since 1945, a Bloomberg News survey of primary dealers showed.
``It was a difficult year to make money in the bond market,'' said Jun Fukashiro, a bond fund manager in Tokyo at Toyota Asset Management Co., which has the equivalent of $10 billion in assets under management. ``People will realize that Japan's economy is resilient enough to carry on its expansion and yields will probably edge higher toward the end of next year.''
Japan's government bonds have handed investors a return of about 0.4 percent this year, the least since 2003, according to an index of 229 of the securities tracked by Merrill Lynch & Co. Japanese bonds maturing in 10 years or more returned 0.8 percent this year, according to Merrill.
Bonds today completed a three-day loss after a report showed sales of homes in the U.S. unexpectedly gained, spurring expectations demand for exports will be sustained.
The yield of the 1.7 percent security due December 2016 gained 1.5 basis points, or 0.015 percentage point, to 1.675 percent as of the 11:05 a.m. morning close in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price declined 0.128 to 100.213.
Japan's central bank raised its key interest rate to 0.25 percent from near zero on July 14, the first increase since 2000.
Outlook for 2007
Ten-year bond yields may rise to 1.8 percent at the end of March, a Bloomberg News survey of 25 primary dealers taken between Dec. 15 and Dec. 22 showed. Sixteen said the central bank will raise rates in the first quarter of the next year.
Primary dealers also said 10-year yields will be at 2 percent at the end of December next year, according to the survey. That would provide a loss of about 0.9 percent, Bloomberg data show.
``It is possible the BOJ will lift rates next month,'' said Koji Ochiai, senior market analyst in Tokyo at Mizuho Securities Co., the fourth-largest buyer at government bond auctions. ``Reports that fuel optimism about the U.S. economy are definitely a plus for the Japanese economy, and may cut demand for bonds.''
Purchases of previously owned homes in the U.S. increased 0.6 percent last month to an annual rate of 6.28 million, after rising 0.5 percent in October, the National Association of Realtors said yesterday in Washington. That compares with a forecast of 6.19 million in the median estimate in a Bloomberg survey of 55 economists.
Rate Policy
The central bank will probably wait until it assesses market conditions before it decides whether to raise interest rates in January, Nikkei English News reported, without saying where it obtained the information. While recent employment and production figures have been strong, there are concerns about consumer spending and prices, the Nikkei report said.
Core consumer prices, which exclude fresh food, rose 0.2 percent from a year earlier in November, the government said on Dec. 26. Chief Cabinet Secretary Yasuhisa Shiozaki said this week Japan's hasn't overcome more than seven years of falling prices.
``The rate increase was really a big event for the bond market and it could have lifted yields much higher,'' said Satoshi Yamada, who helps oversee the equivalent of $6.2 billion in assets at Japan Investment Trust Management Co. ``Bonds stayed relatively strong as companies increased capacity of production faster than consumers gained capability to buy goods, leaving inflationary pressure very weak.''
International Buyers
International investors have bought about 7 trillion yen ($59 billion) more Japanese bonds than they sold this year, the most since 2000. In 2000, bought 10.5 trillion yen more than they sold.
The Nikkei 225 Stock Average climbed 6.9 percent this year, rising for a fourth year, the longest winning streak since the 12 years of gains to 1989 when the so-called `Bubble Economy' peaked.
Ten-year bond futures for March delivery fell 0.12 to 134.05 today on the Tokyo Stock Exchange. Bond futures fell for a second year.