Japan's Five-Year Notes Rise on Mounting Evidence of Recession

http://www.bloomberg.com/apps/news?pid=20601009&sid=a4Wk8IodVwJY

By Theresa Barraclough

Oct. 2 (Bloomberg) -- Japan's five-year government bonds rose as mounting evidence the world's second-largest economy faces a recession prompted investors to favor low-risk assets.

Five-year yields fell as traders increased bets the Bank of Japan will reduce interest rates this year after the central bank's Tankan survey, published yesterday, showed manufacturers are the most pessimistic in five years. Japan's Nikkei 225 Stock Average slumped to a three-year low, boosting the attraction of fixed-income securities.

``There's concern of a deeper recession,'' which led to bond buying, said Susumu Kato, chief economist in Tokyo at Calyon Securities, one of the 24 primary dealers required to bid at government debt sales. ``The five-year bond is one of the safe havens for banks because of the large drop in the stock market.''

The yield on the 1.1 percent note due September 2013 fell 2.5 basis points to 1.04 percent as of 4:08 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.118 yen to 100.282 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery increased 0.20 to close at 137.24 at the Tokyo Stock Exchange.

Reports this week showed industrial production fell at the fastest pace in five years in August, household spending dropped for a sixth month and the jobless rate reached a two-year high.

``The BOJ policy stance will change from neutral to one that considers business conditions,'' said Eiji Dohke, chief strategist at UBS Securities Japan Ltd. in Tokyo.

The chance the BOJ will lower borrowing costs to 0.25 percent from 0.5 percent by year-end jumped to 21 percent from 3 percent a week ago, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

Stock Losses

The Nikkei 225 lost 1.9 percent to close at 11,154.76, the lowest close since May 2005, and the broader Topix index declined 2.2 percent.

Benchmark bonds handed investors a return of 1 percent in the three months ended Sept. 30, the least among Group of Seven nations, according to indexes compiled by Merrill Lynch & Co. The Nikkei decreased 16 percent in the same period.

Ten-year bonds declined after a sale of 1.9 trillion yen ($17.9 billion) in the securities drew less demand than the previous auction in September after the U.S. Senate approved a $700 billion bill that would allow the government to buy troubled assets from banks. Ten-year yields added 1 basis point to 1.51 percent.

`Negative Factor'

The auction ``wasn't good because market participants wanted to be cautious before the vote,'' said Takashi Nishimura, an analyst at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets, in Tokyo. ``In theory, the rescue plan is a negative factor for the bond market.''

The sale attracted bids worth 2.58 times the amount offered, compared to a so-called bid-to-cover ratio of 2.66 times at the Sept. 2 sale.

The lowest price at the auction of 10-year debt was 0.13 yen below the average price, compared to a so-called tail of 0.04 yen in September. The tail is the difference between the lowest price and the average price. The longer the tail, the fewer bids are clustered around the average price.

The U.S. Senate approved the financial-rescue plan by 74 votes to 25. The package now goes to the House of Representatives, which rejected an earlier version of the measure. ``It's very important for us to pass this piece of legislation so as to stabilize the situation,'' President George W. Bush said before the Senate vote.

``The bill itself is needed to stabilize the market,'' said Tomohiko Katsu, deputy general manager of the capital market division at Shinsei Bank Ltd. based in Tokyo. ``It's a last resort measure.''

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.