Japan bonds may rise next week, driving down yields to their lowest levels in almost three months, as the government is likely to downgrade its economic assessment for a fifth month, acknowledging the likelihood of recession.
During the week, the yield on the benchmark No. 231 10-year bond was unchanged at 1.245 percent. The 10-year futures for June delivery fell 0.19 to 140.31.
"I'm looking for bonds to rise next week, as investors buy 10-year debt in anticipation that the government will effectively admit that the economy is in recession," said Seiji Shiraishi, Chief Market Economist at Daiwa Securities SMBC Co. That may push 10-year bond yields as low as 1.15 percent, Shiraishi said.
That's the lowest level for bond yields since March 23, four days after the Bank of Japan decided it would guide overnight interbank rates to zero. The central bank move came just eight months after it said the economy had recovered enough to sustain higher borrowing costs.
The Cabinet Office is likely to increase the severity of the expression it uses to describe the economy in June to "deteriorating" from "weakening," Shiraishi said. "This would be a clear-cut statement implying that the economy is in a state of crisis."
Japan's chief economic planner cast gloom on prospects for growth.
"It's too bad, but the economy has come to a severe point," said Heizo Takenaka, Japan's Minister for Economic and Fiscal Policy, after a Cabinet ministers' meeting today.
Bonds may also rise as measures of the size of the nation's economy point to slowing growth.
Japanese economic growth probably slowed to 0.1 percent in quarter ended March 31, seasonally adjusted, down from 0.7 percent in the previous quarter, according to the median of 21 forecasts in a Bloomberg News survey. The figure is due Monday at 8:50am.
Japanese companies spending on factories and equipment in the first quarter to March grew at about a third the pace of the previous three months, the government said yesterday. That suggests the increase in business investment that helped fuel economic growth the past two years is faltering.
Japanese wholesale prices were also flat in May from April, the government said earlier today. That's good for bonds, as inflation erodes the fixed income bonds pay.
Declining prices also help bonds by improving chances the Bank of Japan will keep interest rates at record lows. The central bank has said it will maintain its key rate target as close as possible to zero until prices rise.
The bank's nine-member policy board is set to meet next Thursday and Friday, when it is likely to leave rates on hold, analysts said.
The overnight interbank rate has traded at 0.01 percent every day since the May 16 start of the present reserve maintenance period. Commercial banks are required to leave a combined ?5 trillion a day in reserves with the bank during the period, which starts on the 16th of the month.
Banks that borrowed funds there and bought 10-year bonds at 1.245 percent made a margin of 123.5 basis points.
That spread is 83 basis points more than if investors chose to buy debt with five years to maturity with borrowed funds. It's also close to the 85.7 basis point widest spread for the year to date of May 30.
The widening of the spread between yields on benchmark bonds and those with five years to maturity also illustrate that five-year yields have fallen faster than 10-year yields. That makes them less attractive to yield-hungry investors.
RSS