Tokyo Market: Bonds could fall as equities recover

JAPANESE government bonds may fall this week as rising stocks suggest there are faster returns to be made from equities, so dampening investor enthusiasm for the fixed-income paid by bonds. The Nikkei 225 topped 19,000 last week for the first time since August 1997, underscoring the belief economic recovery is on track and prices for assets other than bonds will rise.

Buying of stocks is being driven partly by near-zero interest rates, which help fund purchases cheaply, said Michael Wilkins, a cross-market dealer at Credit Lyonnais in Tokyo. It "encourages investors to park their funds somewhere other than fixed income, even if there is higher risk."

In the week, the benchmark government bond yield rose 5 basis points to 1.890 per cent. In the past six months, 10 or more-year bonds generated an average loss of almost 4 per cent in yen terms, while the key stock index gained nearly 15 per cent.

On Thursday, the Ministry of Finance auctioned 1.4 trillion (pounds 8.3bn) in 10-year bonds with a 1.9 per cent coupon, which saw 2.36 bids for each bond on offer. That's not impressive over the long term, but is the highest demand for a new bond this year. So Mr Wilkins is not convinced this is a bond-buying signal. "You can make 1.9 per cent in 10 years in the bond market or in 10 minutes from stocks," he said.

With the new sales, Japan's borrowing for the year to end-March 2000 will total 38.6 trillion, accounting for a record 43.4 per cent of government revenue. That also fuels fears of further downgrades in credit ratings. Last week, Moody's said: "More debt isn't good for the ratings." It is a year since Moody's lowered Japan's rating to Aa1 from Aaa.

Tuesday sees at least seven pieces of economic data released, including October unemployment. But Monday's release of October industrial production numbers will probably be more important for bonds. Output is at its highest in more than two years, after posting the biggest quarterly gain since 1976 in the July-September quarter. This has underscored the belief that the economy is recovering, and is making investors more optimistic.

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