Tokyo, Feb. 4 (Bloomberg) -- Japan's 10-year government bond auction drew about half the average demand of debt sales in 2002, a sign investors are shunning yields that are 0.1 percentage point away from record low. Bonds fell following the sale. The Ministry of Finance sold 1.33 trillion yen ($11.2 billion) of bonds at the auction. The coupon was set at 0.8 percent, a record low. The auction drew bids for 2.27 times the amount of debt on offer, less than the average of 4.41 for 2002. ``I avoided new 10-year bonds with a record low coupon as there may be limited room for yields to fall in coming months,'' said Yoshiaki Murakawa, who manages about 300 billion yen at SG Yamaichi Asset Management. The No. 245 bond, which carries a 0.9 percent coupon and matures in 2012, fell 0.229 to 100.455 as of 4:38 p.m. Its yield rose 2.5 basis points to 0.85 percent after climbing by as much as 3.5 basis points, according to Japan Bond Trading Co. A basis point is 0.01 percentage point. Ten-year bond futures for March delivery fell 0.27 to 142.56 at the 3 p.m. close of trade.
Higher returns on foreign bonds may be luring some investors away from Japan's government debt market, the world's largest. About 95 percent of Japanese government bonds are owned domestically. Nomura Holdings Inc. last week said it sold about $1.9 billion of foreign-currency bonds to individual investors in Japan in the three months ended Dec. 31, 10 percent more than a year earlier. Ten-year government bonds of New Zealand, which holds a top AAA rating on local-currency debt from Standard & Poor's, yield about 5.9 percent and those of the U.S. yield about 4 percent. Japan's yen debt is rated AA-, the fourth-highest level, by S&P. Ten-year yields on Jan. 30 fell to as low as 0.75 percent, a record.
September Failure
Demand for auctions has been improving since September, when Japan failed to raise as much money as it wanted in a 10-year government bond sale. That was the first time the country didn't attract enough buyers for its 10-year debt since competitive price auctions of the securities began in 1989. The coupon at that auction was 1.2 percent. Since then, bonds have been among the few winning investments in Japan, gaining for seven of the past eight weeks, as the economy struggled to avoid its fourth recession in a decade and deflation deepened. Nationwide prices excluding fresh food fell 0.7 percent in December from a year ago, extending a slide that began in April 1998, and industrial production slumped to a 15-year low last year, the government said last week.
This month's auction follows a sale of 0.9 percent 10-year bonds last month that drew bids worth 18.6 times the amount of debt sold, the highest on record for that maturity. The Nikkei 225 Stock Average fell 13 percent in past 12 months and property prices are in a decade-long slump. In contrast, 10-year bonds have returned about 8 percent, including reinvested interest, in the past year.
Yen
Bonds have fallen the past three days after central bank head Masaru Hayami on Jan. 30 said benchmark yields were ``too low.'' Bond yields have risen about 11 basis points since Hayami's statement. ``People are skeptical yields can go lower from here,'' said Akihiko Yokoyama, a fixed-income strategist at JP Morgan Securities Asia Ltd. Bonds may also fall on concern the Ministry of Finance will sell yen to help rein in deflation after saying on Friday that it sold yen last month. A weaker currency may boost export earnings and increase the cost of imports. ``The yen strengthening was one of the bullish factors for'' bonds, JP Morgan's Yokoyama said. The weakening of the yen this week ``is definitely one of reasons for'' falling bonds..
Broker Confidence
The lowest successful price at the 10-year auction was 99.60 yen, less than the 99.90 yen median forecast of a Bloomberg News survey. ``Brokers didn't have enough confidence of sufficient demand from investors on such a low coupon bond,'' said Ryoichi Katagiri, who helps oversee about 9 trillion yen of fixed-income assets at Shinkin Central Bank. Mitsubishi Securities Co. was the largest buyer at the auction, with 196 billion yen of accepted bids, according to estimates by Hiroyuki Kubota, a fixed-income analyst at RP Tech Inc. That was followed by Daiwa Securities SMBC Co. with 153.2 billion yen and Nomura Securities with 140 billion yen. In addition to the bonds sold at auction, the government also sold 470 billion yen to non-competitive bidders. ``It was a bad auction,'' said Jai Tiwari, a fixed-income analyst at IDEAglobal Ltd. Bonds ``really took a hammering.''
Shorter Maturities
Some investors may have bought shorter-maturity debt instead of 10-year bonds. A 2.1 trillion yen sale of six-month bills today garnered bids worth 458 times the amount of debt on offer, 10 times the demand at the previous auction. The difference in yield between two-year and 10-year government debt has widened to 82 basis points from 71 basis points last Thursday when it touched a more than four-year low, a sign investors favor shorter debt over longer bonds, analysts said. SG Yamaichi's Murakawa said he favors debt with about eight years to maturity. The gap in yields between eight-year debt and 10-year bonds has narrowed to about 22 basis points from 37.4 basis points in August, the widest point in 2002, according to Bloomberg data. //www.quote.bloomberg.com/