Tokyo: Japan’s 10-year government bonds declined, ending two days of gains, on speculation that yields are near the lowest since March, keeping investors away before an auction of the securities next week.
Pre-auction trading suggests the ministry of finance will set the smallest coupon in more than a year on the 1.9 trillion yen (Rs64,600 crore) of 10-year debt. Yields, which move inversely to prices, extended their rebound from a low of 1.595% reached on 1 May after a US report showed manufacturing growth accelerated at the fastest pace in almost a year.
“A 1.6% yield is a resistance level and there’s strong selling pressure,” said Satoshi Kon, who helps oversee the equivalent of about $19 billion (Rs77,900 crore) in Japanese debt at Pension Fund Association in Tokyo, which has more than 1,600 corporate funds as members.
The yield on the 1.7% bond due in March 2017 rose 1.5 basis points, or 0.015 percentage point, to 1.625% on the evening of 2 May in Tokyo at Japan Bond Trading Co., the nation’s largest inter-dealer debt broker. The price fell 0.129 yen to 100.637 yen.
Japanese bonds also dropped on concern brokers will sell debt to hedge against an increase in yields. The finance ministry may set a 1.6% coupon on the 10-year securities it will sell 8 May, the lowest since March 2006.
Ten-year bond futures for June delivery declined 0.12 to 134.46 on the Tokyo Stock Exchange. Manufacturing in the US, Japan’s biggest export market, grew in April at the fastest rate since May 2006 as orders jumped and production improved, the Institute for Supply Management’s index showed on 1 May.
Japan’s benchmark 10-year yields have fallen below 1.6% on only nine days this year. On 28 February, yields dropped as low as 1.59% as a plunge in Chinese shares triggered a global sell-off in equities and the Nikkei 225 Stock Average had its largest slide since June.
Bond yields are unattractive at current levels and may rise to reflect the economic outlook in coming weeks, Pension Funds’ Kon said.
Japan’s economy probably grew at an annual 2.8% pace in the three months through March, the cabinet office is forecast to say.
Bond losses were limited on speculation the central bank will keep interest rates on hold in coming months, said Yuuki Sakurai, who helps manage $48 billion in assets at Fukoku Mutual Life Insurance Co.
“There will be demand for bonds should the central bank keep rates unchanged for a while,” said Sakurai.
Monthly highs for 10-year benchmark yields have fallen this year, reaching 1.76% in January, 1.75% in February and 1.71% in April.
The country’s 25 primary dealers last December wrongly predicted that 10-year yields would be at 1.8% at the end of March. Yields closed at 1.65% on 30 March.
Morgan Stanley Japan Securities Co. was the only primary dealer to give a correct yield forecast.
Nobuyuki Akama and Hidenori Yamanaka contributed to this story.