Japanese Bonds Plunge, Yields Have Biggest Increase in 4 Years
July 3 (Bloomberg) -- Japanese bonds plunged, causing the biggest rise in 10-year yields in four years, as the Nikkei 225 Stock Average touched a 10-month high and a debt sale drew the least bids since a failed auction in September.
The benchmark yield rose above 1 percent for the first time this year as the Ministry of Finance's 1.9 trillion yen ($16 billion) sale of 10-year, 0.9 percent bonds drew bids worth 1.68 times the amount of debt sold by competitive auction. That was half the ratio of 3.16 times last month.
``The auction results were awful. I would say it's close to a failure,'' said Yuuki Sakurai, who helps oversee 4.6 trillion yen in assets at Fukoku Mutual Life Insurance Co., the 10th largest Japanese life insurance company. ``That hit the bond market very hard.''
The No. 250 bond, which carries a 0.5 percent coupon and matures in 2013, sank 1.810 to 94.491 as of the 6:05 p.m. close at Japan Bond Trading Co. in Tokyo. Its yield soared 21 basis points, the biggest increase since Feb. 2, 1999, to 1.115 percent. A basis point is 0.01 percentage point.
Japan has the largest government bond market in the world with 562 trillion yen in marketable securities, or $4.7 trillion, outstanding at the end of March, compared with the U.S. government's $3.3 trillion.
The slump in bonds may increase financing costs for a government whose debt exceeds gross domestic product by 40 percent. Yields are now above the 0.935 percent level they were at when the cabinet agreed on spending and financing plans for the fiscal year starting April 1.
Government Response
The slump also prompted concern banks will lose money on their bond investments, causing a plunge in bank shares. Mizuho Financial Group Inc. stock fell 7.4 percent.
``We are watching closely the movements of long-term yields,'' said Bank of Japan board member Miyako Suda in a speech in Oita in southwestern Japan. ``We still need some time to judge the effect of asset prices on the economy.''
Suda, one of nine policy board members, said the central bank isn't considering concrete steps to manage bond sales together with the government. He said it's up to the four biggest banks, which held 49.4 trillion yen of bonds as of March 31, to manage their own market risks.
The Nikkei 225 touched the highest since August, closing up 0.3 percent to 9624.80, helped by a U.S. government report showing that factory orders unexpectedly rose in May.
Too Low
Signs the U.S. will lead a global economic recovery have caused ten-year bond yields to more than doubled after reaching a record low 0.430 percent on June 11.
``In the short-term we are still bearish on bonds,'' said Naruki Nakamura, who helps manage the equivalent of about $3.38 billion of bonds at Fischer, Francis Trees & Watts, which is affiliated with BNP Paribas SA, France's biggest bank by assets. An ``aggressive shift from stocks to bonds brought yields to an overheated level.''
Nakamura last month reduced the amount of 20-year and 30-year bonds he is holding to less than that in the Nomura Bond Performance Index, which he uses to judge performance.
Bonds also fell as stocks extended a rally that has pushed them up every day since Tuesday when the Bank of Japan's quarterly Tankan survey showed large manufacturers were the least pessimistic in two years.
``Because of the strong equity market, sentiment is changing about the outlook for the economy,'' said Yoshihiro Ishida, who helps oversee the equivalent of $2.53 billion at Meiji Dresdner Asset Management Co. in Tokyo, jointly owned by Japan's fourth- largest life insurer and Europe's fourth-largest bank. ``We might see further declines from here'' in bonds.
10-Year Failure
The difference between the lowest accepted bid and the average bid at the 10-year sale was 0.9 yen, compared with 0.03 yen at the previous auction and 0.53 yen at the September sale that failed to draw enough bids. A larger gap means the government had to accept a wider range of bids in order to sell all the bonds.
In September, an auction of 1.35 trillion yen from a 1.8 trillion yen sale of 10-year government bonds drew bids for 88 percent of the amount offered, the first failure of a 10-year auction since Japan began selling the securities by competitive bidding in 1989.
The No. 27 note, with a 0.2 percent coupon and maturing in 2008, fell 0.431 to 98.693, according to Japan Bond Trading. Its yield rose 9 basis points to 0.47 percent, after rising as high as 0.48 percent, the highest in more than a year.
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