apan's 10-Year Bonds Drop; Yields at 2-Month High on Auction
Jan. 10 (Bloomberg) -- Japanese 10-year government bonds fell, pushing yields to the highest in more than two months, after an auction of the debt attracted less demand than traders expected.
The 1.9 trillion yen ($15.9 billion) sale had a lowest accepted price of 99.70, below the median forecast of traders surveyed by Bloomberg News. Bonds also fell after Hideo Hayakawa, the Bank of Japan's chief economist, said consumer spending may have had a ``big'' increase in the fourth quarter of last year.
``The poor auction and Hayakawa's comments contributed to bond losses,'' said Norihisa Takao, who helps oversee the equivalent of about $41.9 billion of debt in Tokyo at Daiwa Asset Management Co. ``The auction showcased weaker demand partly because a 1.7 percent coupon disappointed some investors.''
The yield on the benchmark 10-year bond rose 1.5 basis points to 1.75 percent as of 4:30 p.m. in Tokyo, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. It was the highest since Nov. 7.
The price on the 1.7 percent bond due in December 2016 dropped 0.126 to 99.577. A basis point is 0.01 percentage point. Ten-year bond futures for March delivery fell 0.11 to 133.53 as of the 3 p.m. close at the Tokyo Stock Exchange.
The Ministry of Finance set a 1.7 percent coupon at today's auction, matching the payout last month. A 1.8 percent coupon was expected, according to a Bloomberg News survey taken yesterday.
The difference between the lowest price and average price the bonds were sold at was 0.06 yen, the same as the previous sale. The figure suggested weak demand, said Hitomi Kimura, a fixed- income strategist in Tokyo at JPMorgan Securities Japan Co.
BOJ's Hayakawa
The auction drew bids worth 2.47 times the amount of auctioned, compared with 2.32 at last month's sale.
Bonds also dropped after the BOJ's Hayakawa said the trend in consumer spending would show a gradual increase over the longer term. He spoke at a seminar of Japan Center for Economic Research in Tokyo today.
Consumer spending, which accounts for more than half of the economy, fell 0.9 percent in the third quarter, the biggest drop in almost a decade. The government in November downgraded its evaluation of the economy for the first time since 2004, citing sluggish consumer spending.
Hayakawa's comments caused traders to renew bets that the Bank of Japan may raise rates next week.
Interest Rate Swaps
Contracts for the exchange of overnight rates suggest a 65 percent chance of a quarter-point increase at the Bank of Japan's two-day policy meeting ending Jan. 18, according to Credit Suisse Group. The figure rose from today's low of 56 percent.
``Even if the Bank of Japan doesn't raise rates this month it will probably raise them this quarter,'' said JPMorgan's Kimura, whose company is one of 25 primary dealers that are obliged to bid at government auctions.
Declines in bonds were limited as stocks slumped, increasing demand for debt's fixed payments. The Nikkei 225 Stock Average dropped 1.7 percent, the biggest slide since Nov. 20.
``Declining stocks help spur buying in bonds,'' said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo, part of Japan's biggest lender. ``The environment looks favorable to bonds.''
Five-year notes, more sensitive than longer debt to changes in rate expectations, erased gains after Hayakawa spoke. The notes showed little reaction to comments made by Nobuyuki Nakahara, a former Bank of Japan policy maker.
Nakahara Comments
Nakahara, speaking at a panel discussion hosted by Nikko Citigroup Ltd. in Tokyo today, said the central bank shouldn't raise rates at its policy meeting next week. The government should oppose a rate increase if the central bank proposes one, he said.
The yield on the 1.2 percent note due December 2011 rose half a basis point to 1.3 percent. It earlier dropped as low as 1.27 percent because some traders speculated the central bank will hold off increasing borrowing costs.
Overseas investors were net sellers of Japanese bonds for a second week in the period ended Dec. 30, according to figures based on reports from designated major investors released by the Ministry of Finance in Tokyo.
Foreign investors sold a net 546.1 billion yen in Japanese bonds during the week.