Japan's Bonds Complete Weekly Decline as Local Stocks Rebound

Dec. 22 -- Japan's bonds completed a weekly decline after a rebound in the stock market sapped demand for the relative safety of government debt.

The extra yield investors demand to hold 20-year securities instead of two-year debt increased to about 1.43 percentage points yesterday, approaching the widest closing spread since Feb. 1. The two-year notes outperformed the longer-dated debt because of a government plan published this week to lower sales of some securities maturing in five years and less.

``The increase in equities boosted people's willingness to take more risks'' and shift away from bonds, said Xinyi Lu, chief strategist at the international treasury at Mizuho Corporate Bank Ltd. in Tokyo.

The yield on the 10-year note rose half a basis point this week to 1.55 percent, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. The price of the 1.5 percent bond due in December 2017 fell 0.043 yen to 99.567 yen.

Ten-year bond futures for March delivery declined 0.36 yesterday to 136.49 on the Tokyo Stock Exchange as the yield on 10-year securities rose 3 basis points. The Nikkei 225 Stock Average advanced 1.5 percent.

The government cut debt sales scheduled for the fiscal year starting in April by about 4 percent to 105.1 trillion yen ($929 billion), the lowest in six years, a Dec. 20 statement showed.

Two-Year Auction

The Ministry of Finance sold 1.7 trillion yen in two-year notes yesterday at a coupon of 0.7 percent, the lowest since September 2006. The auction drew orders for 2.37 times the amount on offer, less than a so-called bid-cover ratio of 3.05 at last month's sale.

Japan has bought back more than 20 trillion yen of its bonds since 2003 in an attempt to reduce outstanding debt. The country has the largest government bond market in the world, with 773 trillion yen in marketable securities as of Sept. 30, 55 percent more than the U.S.'s $4.4 trillion, the world's second largest.

The decline in bonds was limited by speculation increasing losses tied to subprime securities will prompt investors to seek the safety of government debt.

Bear Stearns Cos., the second-biggest underwriter of U.S. mortgage bonds, reported its first-ever loss on Dec. 20 and said it would take a $1.9 billion charge on mortgages.

`Defensive' Investments

``People are concerned about the volatility in the market,'' said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $41.5 billion in assets. ``People are being defensive on their investment and will hold either cash or short-term'' government debt.

Two-year notes also outperformed longer-maturity debt after Bank of Japan board member Atsushi Mizuno rejoined the majority on Dec. 20 in voting to leave interest rates unchanged. Policy makers unanimously decided to keep their benchmark interest rate at 0.5 percent for a 10th month.

``People don't have to worry about the interest-rate hike,'' Sakurai said. Shorter-maturity debt tends to be more sensitive to changes in monetary policy than longer-maturity notes.

The odds the BOJ will raise rates by the end of September is 22 percent, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

Negroponte to Testify in Probe of Destroyed CIA Tapes (Update1)

Dec. 21 -- Deputy Secretary of State John Negroponte said he is prepared to testify before Congress about the CIA's destruction of tapes showing harsh interrogation of terrorism suspects and will cooperate with ``whomever is investigating this matter.''

Negroponte, 68, who was director of national intelligence in 2005 when the tapes were destroyed, said he was confident that ``whatever record is developed will show that I dealt with this situation in an entirely appropriate manner.''

Newsweek magazine reported earlier this month that Negroponte strongly advised then-Central Intelligence Agency Director Porter Goss in the summer of 2005 not to destroy the tapes.

Negroponte, in an interview on Bloomberg Television's ``Political Capital with Al Hunt'' that will air this weekend, declined to discuss details of the tapes case, citing continuing investigations by Congress and the Justice Department. Nor would he discuss whether President George W. Bush should have known about the destruction of the tapes before this month, when Bush says he first learned of it.

Turning to Iraq, Negroponte said the U.S. will probably begin negotiations ``in earnest'' in February with that country's government for a long-term strategic agreement, with the goal of reaching an accord by the middle of 2008.

Bush administration officials have said such an agreement would clarify the long-term U.S. presence in Iraq, including the American military role there. ``We're going to certainly work hard towards achieving it,'' Negroponte said.

`Some Political Progress'

Negroponte, who served as U.S. ambassador to Iraq in 2004- 2005, said he was encouraged by his recent trip there. He said violence was down and there has been ``some political progress'' toward easing religious and ethnic tensions.

He said the Iraqi parliament had enacted a pensions law, was making progress toward easing legal restrictions on former members of Saddam Hussein's ruling party, and was also working on legislation defining the powers of provincial authorities.

``This was the most encouraging trip that I've taken'' to Iraq since leaving the ambassador's post in March 2005, he said.

Negroponte said the Kurdish Regional Government, which holds sway in northern Iraq, has acted in recent weeks to rein in the anti-Turkish activities of Kurdish guerrillas based in their territory. The rebels are members of the Kurdistan Workers' Party, known by its Kurdish initials PKK.

Roadblocks

Negroponte said the Kurdish government has begun to set up roadblocks restricting the PKK's movement and to close down their offices. An even more convincing move, he said, ``would be to show that they are really committed to banning'' the activities of the PKK, ``and I think they have taken steps to that end.''

Negroponte said such anti-PKK steps by the Kurdish regional authorities were preferable to Turkish military strikes on the guerrillas, such as the ones that took place earlier this week. He confirmed that the U.S. has ``cooperated with the Turks'' on anti-PKK operations.

The PKK uses northern Iraq as a base to launch cross-border attacks on Turkish forces in support of demands for an autonomous Kurdish region in southeastern Turkey. Turkish leaders have threatened for weeks to launch a full-scale military incursion into northern Iraq to destroy the PKK.

Regarding the CIA tapes, Negroponte praised current CIA Director Michael Hayden and other intelligence officials, calling them ``honorable professionals doing the best job they feel they can do in support of the national interest.''

He said of Hayden, 62, who served as his deputy during his tenure as national intelligence director: ``I have the highest regard for his professionalism and integrity. And I'd point out that he is the one who himself divulged the fact that the tapes had been destroyed. So I'm sure he wants this matter to be clarified once and for all.'