Stocks, Bonds & Forex Trading
Source: www.bloomberg.com

By Yasuhiko Seki and Theresa Barraclough

Jan. 28 (Bloomberg) -- Japanese five-year bonds fell for a third day, reversing earlier gains, as stocks rebounded and reduced demand for government debt.

Five-year bond yields also climbed to a one-week high on speculation the U.S. will create an institution to remove toxic assets from banks’ balance sheets, helping ease the global credit crisis. Demand for shorter-dated notes waned on speculation primary dealers tried to push up yields to secure a higher coupon at tomorrow’s 2 trillion yen ($22.4 billion) auction of two-year government notes.

Bonds reversed gains on “rising stocks, which reflected positive expectations about the U.S. bank plan,” said Yoshiaki Hattori, a derivatives manager in Tokyo at Aozora Bank Ltd.

The yield on the 0.7 percent bond due December 2013 rose one basis point to 0.72 percent as of 4:10 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.047 yen to 99.905 yen. Yields reached 0.660 percent on Jan. 23, the lowest level since September 2005. A basis point is 0.01 percentage point.

Japan’s bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.79 with the Nikkei 225 in the past two weeks, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep.

The yield on the benchmark 10-year bond fell half a basis point to 1.255 percent. Ten-year bond futures for March delivery rose 0.02 to 139.03 at the Tokyo Stock Exchange and the Nikkei 225 Stock Average advanced 0.6 percent.

Toxic Assets

The Federal Deposit Insurance Corp. may manage the so- called “bad bank” that the Obama administration is likely to set up as it tries to end the credit crisis, two people familiar with the matter said yesterday.

Japan’s benchmark bonds have handed investors a loss of 0.3 percent in the past week through yesterday, according to indexes compiled by Merrill Lynch & Co.

The decline in bonds was limited before a government report this week that economists say will show manufacturers slashed production at a record pace last month. Japan’s economy probably shrank 2.85 percent in the three months ended Dec. 31, according to a Bloomberg survey of economists.

Industrial output may have slumped 8.9 percent in December, the sharpest decline in 55 years, economists predict the Trade Ministry will say on Jan. 30. The drop would exceed the record 8.5 percent decline the previous month.

‘Bullish on Bonds’

“The 10-year yield above 1.25 percent is buying-territory for investors,” said Keiko Onogi, a debt strategist in Tokyo at Daiwa Securities SMBC Co., one of the 24 primary dealers that are required to bid at government debt sales. “In the long-run, people will remain bullish on bonds and bearish on the economy. Bonds are still the safest option.”

Two-year yields climbed half a basis point to 0.4 percent today, the highest since Dec. 26. Pre-auction trading suggests the Ministry of Finance will set a 0.4 percent coupon on the new debt, down from 0.5 percent at the previous auction in December.

The Dec. 18 sale drew bids for 2.4 times the amount on offer, compared with a so-called bid-to-cover ratio of 2.80 at the November sale. Last year’s average was 3.04 times.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.
Last Updated: January 28, 2009 02:30 EST