Japan's 10-Year Bond Spread to U.S. Debt Near Widest in a Month

Dec. 15 -- The difference in yield between Japanese and U.S. 10-year bonds climbed this week to the widest in a month on signs inflation is a bigger threat in the U.S. than in Japan.

The extra yield investors demand to hold Treasuries instead of Japanese notes climbed as high as 2.696 percentage points yesterday, the most since Nov. 14, after a Labor Department report showed the biggest increase in U.S. producer prices in 34 years. Japan's bond yields rose less than U.S. debt after confidence among the Asian nations' largest manufacturers slumped more than forecast, cementing speculation the Bank of Japan will delay raising interest rates.

``JGBs are a better buy than Treasuries at the moment,'' said Xinyi Lu, chief strategist at the international treasury division at Mizuho Corporate Bank Ltd. in Tokyo. ``Nobody believes very firmly that there will be inflation here again.''

The yield on the 1.5 percent bond due December 2017 fell 2 basis points this week to 1.545 percent as of the 6:05 p.m. close in Tokyo yesterday at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.173 yen to 99.61 yen. A basis point is 0.01 percentage point.

The yield spread between 10-year German bonds and similar- dated Japanese debt widened to as much as 2.78 percentage points this week, the most since June 2004. The yield on 10-year Treasury bonds surged 12 basis points on Dec. 13 in New York.

``In Japan there is ongoing weakness in sentiment,'' said Susumu Kato, chief economist in Tokyo at Calyon Securities. ``Longer term inflation pressures still exist in the U.S., so the widening spread is a reflection of inflation expectations.''

Japan's Tankan

The Bank of Japan's quarterly Tankan index of manufacturer sentiment fell for the first time since March to 19 points in December from 23 in September, the central bank said yesterday in Tokyo. A positive number means optimists outnumber pessimists.

``The large manufacturers' index was a touch weaker, which is supportive'' for bonds, said Naomi Hasegawa, a senior debt strategist at Mitsubishi UFJ Securities Co. in Tokyo.

Japan's central bank has kept the benchmark overnight lending rate at 0.5 percent since February. JPMorgan Chase and Co. calculations using overnight interest-rate swaps show only a 1 percent chance the rate will rise by March.

Futures on the Chicago Board of Trade show that traders are pricing in a 100 percent chance that the Fed will reduce interest rates by 25 basis points on Jan. 30.

Japan 10-year bond futures for March delivery declined 0.28 to 136.46 yesterday on the Tokyo Stock Exchange.

Breakeven Rates

Ten-year yields in Japan may rise to 1.66 percent by the end of March, according to the weighted average forecast of a Bloomberg News survey. Yields on similar-maturity U.S. notes will be at 4.10 percent in the same period, another survey shows. The estimate puts a heavier weighting on more recent forecasts.

The so-called breakeven rate, the extra yield paid by Japanese 10-year conventional government debt compared with similar-maturity inflation-linked bonds, was about 29 basis points, compared with 2.33 percentage points for that of U.S. Treasuries. The measure shows investor expectations for average annual consumer price increases in the next decade.