Japan's Bonds Rise on Speculation Funds Buying to Track Index

Japan's Bonds Rise on Speculation Funds Buying to Track Index
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By Chris Cooper
Nov. 22 (Bloomberg) -- Japanese government bonds rose on speculation investors are buying to match a change in a benchmark index followed by the nation's largest pension fund.
Nomura Securities Co. will add debt including 10- and 20-year bonds sold this month to its Bond Performance Index in December and remove securities due in a year and less. The Government Pension Investment Fund, Japan's largest pension fund with 25.5 trillion yen ($217 billion) in domestic debt as of March-end, matches 80 percent of its yen bond holdings to the index.
``There is buying of longer maturity bonds to match the index change,'' said Shinji Kunibe, a fund manager in Tokyo at the local subsidiary of JPMorgan Asset Management, which oversees $847 billion in assets. ``We're going to see more buying as we approach the end of the month.''
The yield on the benchmark 10-year bond dropped 1 basis point to 1.66 percent at 3:18 p.m. in Tokyo, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. The price of the 1.8 percent bond due September 2016 advanced 0.085 yen to 101.181 yen. A basis point is 0.01 percentage point.
Yields on 2.2 percent bonds due September 2026 fell 1 basis point to 2.15 percent. Prices rose 0.139 yen to 100.694 yen.
The gap in yield between five- and 20-year debt narrowed to 93.1 basis points today, from 97.9 basis points at the start of the month. A close below 93 basis points would be the tightest spread since 90.9 basis points on Aug. 24.
Stock Gains
Kunibe said he is keeping the average duration of his bond holdings slightly longer than his benchmark. Duration estimates how much a bond price will change when yields move. The higher the duration, the more the debt returns when yields fall.
Ten-year bond yields may drop to 1.60 percent by the end of the month, Kunibe said.
Bond futures fell earlier as the Nikkei 225 Stock Average headed for a two-day recovery from losses over the past week.
Benchmark 10-year yields, which move inversely to prices, had a correlation of 0.85 with the Nikkei in the past week, Bloomberg data showed. A value of 1 means the two moved in lock step.
``Signs that a slide in stocks is slowing may push up bond yields,'' said Jun Ishii, chief fixed-income strategist in Tokyo at Mitsubishi UFJ Securities Co., part of Mitsubishi UFJ Financial Group Inc., Japan's biggest bank.
The Nikkei gained as much as 1.1 percent today. On Nov. 20, it tumbled 2.3 percent, the biggest drop since July 18.
Change in Index
Bond futures erased earlier declines, ending up on the day, amid speculation the government will downgrade its view of the economy for the first time in two years, weakening the central bank's case for a second interest-rate increase this year.
Today's Cabinet Office report will describe the economy as ``recovering although weakness is detected in consumption,'' according to a Nihon Keizai article yesterday. The report compiled in October said the economy was ``recovering,'' using the same expression for the ninth straight month, the newspaper said.
``The Bank of Japan isn't going to be able to raise rates next month,'' said JPMorgan Asset's Shinji Kunibe. ``It's a good time to buy bonds.''
Ten-year bond futures for December delivery rose 0.05 to 134.96 as of the afternoon close on the Tokyo Stock Exchange.
The central bank increased rates in July for the first time in six years. Ten-year yields have gained, pulling yields down from 1.855 percent since the day the central bank pushed up rates.
The difference between the yield on 10-year bonds and the overnight lending rates between banks, the central bank's key rate, shrank to 1.41 percentage points yesterday from its high for the year of 2 percentage points on May 10.