Japan's Five-Year Notes Have Second Weekly Drop on Rate Outlook
By Keiko Ujikane
Oct. 6 (Bloomberg) -- Japan's five-year notes fell for a second week after comments from Bank of Japan Deputy Governor Toshiro Muto and an increase in business confidence revived concern interest rates will rise.
Yields reached a six-week high after two Federal Reserve policy makers said inflation is still a risk in the U.S., Japan's biggest export market. Muto yesterday said the bank won't necessarily have to wait until after the U.S. Christmas shopping season before raising rates. Traders boosted bets rates will increase in Japan after the Tankan survey on Oct. 2 showed confidence rose to a two-year high last month.
``Yields are set to rise,'' said Satoshi Kon, who helps oversee the equivalent of $9.6 billion in Japanese debt at the Pension Fund Association in Tokyo. ``Muto's comments rejuvenated expectations for higher rates, which had been weakened by pessimism over a slowdown in the U.S. economy.''
The yield on the 1.2 percent note due September 2011 rose 3 basis points this week to 1.155 percent as of 5:20 p.m. in Tokyo, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. It earlier reached 1.20 percent, the highest since Aug. 25. A basis point is 0.01 percentage point.
Benchmark 10-year yields rose 3.5 basis points to 1.705 percent on the week. Ten-year yields may rise to 2 percent in the next six months, said Kon at the association, which has more than 1,600 corporate pension funds as members.
U.S. Treasuries dropped yesterday after Philadelphia Fed President Charles Plosser said keeping rates at current levels or even pushing them higher may be in the ``best interests'' of the economy. Federal Reserve Vice Chairman Donald Kohn said on Oct. 4 he was more concerned about inflation than slowing growth.
`Important Indicator'
Muto was the first local policy maker to speak since the central bank's Tankan survey. Five-year notes fell the most in three months on Oct. 2 after an index of confidence among large manufacturers rose to a two-year high of 24 points in September.
``To be sure, Christmas sales numbers will be an important indicator to assess the U.S. economy,'' Muto said yesterday at a news conference in Kyoto, western Japan, after meeting business executives. ``But it doesn't mean that we won't be able to make any policy changes until we see those results.''
U.S. service industries, which account for about 90 percent of the economy, expanded in September at the slowest pace in more than three years, a report from the Institute for Supply Management showed on Oct. 4.
U.S. Job Data
Bonds gained today, halting a two-day decline, before a U.S. government report that is expected to show employers last month added the least number of jobs since May.
The Labor Department report today may show U.S. employers hired 120,000 workers in September, down from 128,000 in August, according to a Bloomberg News survey.
``Since bonds were oversold in the past several days, some people are taking those positions off today before the U.S. job data,'' said Takashi Fujiwara, a trader at Resona Bank Ltd., a unit of Japan's fourth biggest lender by assets.
Concern over U.S. growth spurred demand for debt at the government's 1.9 trillion yen ($16 billion) sale of 10-year bonds on Oct. 3. The auction drew bids worth 3.12 times the amount auctioned, the highest ratio since January.
Bonds were poised for a rebound today according to a technical indicator used by traders. The five-day relative strength index for 10-year yields rose to 70 yesterday from 67. A reading of 70 or above suggests yields are set to decline.
The yield on the benchmark 1.7 percent bond due in September 2016 dropped 2.5 basis points to 1.705 percent today, according to Japan Bond Trading.
Rate Outlook
Three-month Euroyen futures indicate traders are increasing bets the central bank will raise borrowing costs by March.
Contracts for March delivery yielded 0.65 percent today, up from 0.635 percent a week ago. The yield on the December contract rose to 0.535 percent from 0.52 percent a week ago.
The futures settle to a benchmark three-month lending rate that averaged 0.51 percentage point when the central bank's key rate was 0.25 percent from Aug. 11, 2000, to Feb. 27, 2001.
The central bank will raise its key overnight loan rate from 0.25 percent by March 31, according to 12 of 16 economists surveyed by Bloomberg after the Tankan survey.
``The drop in U.S. Treasuries may lead to selling in Japanese bonds,'' said Makoto Yamashita, Tokyo-based chief bond strategist at Lehman Brothers Japan Inc., one of 25 primary dealers required to bid at government debt auctions. ``Muto's comments poured cold water on the market as people had bet on the view that the central bank won't raise rates this year.''
To contact the reporter on this story: Keiko Ujikane in Tokyo at
[email protected] .
Last Updated: October 6, 2006 04:34 EDT
.... ed un buon W.E. a tutta la bbanda. 
