Oct. 3 (Bloomberg) -- Japan’s notes gained, pushing five- year yields to the lowest level in four years, as stocks extended a global rout after a manufacturing gauge dropped and jobless claims rose in the U.S., the world’s largest economy. Benchmark notes completed a second weekly gain as concerns about the U.S. economy’s recovery overshadowed reports yesterday that showed Japan’s jobless rate unexpectedly retreated from a record and household spending rose. The Bank of Japan’s Tankan survey released Oct. 1 showed Japanese companies plan to slash spending 10.8 percent this year, more than projected in June. “It is premature to judge that the fall in Japan’s jobless rate heralds the beginning of an improvement in the labor market,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Ltd. “There is a strong chance the recovery will stall ahead, which will support bonds.” Five-year yields fell 2.5 basis points this week to 0.555 percent, the lowest level since September 2005, in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 0.7 percent bond due September 2014 rose 0.120 yen to 100.699 yen. Ten-year yields dropped 5.5 basis points this week to 1.250 percent after reaching 1.245 percent yesterday, the lowest since Feb. 18. A basis point is 0.01 percentage point. Ten-year bond futures for December delivery advanced 0.57 this week to 139.61 at the Tokyo Stock Exchange. The Nikkei 225 Stock Average declined 5.2 percent this week. Benchmark 10-year yields had a correlation of 0.6 with the Nikkei 225 in the past three weeks, according to Bloomberg data. A value of 1 means the two moved in lockstep. ‘Bonds Will Firm’ Bonds rose after the number of Americans filing first-time claims for unemployment benefits climbed by 17,000 to 551,000 last week and the Institute for Supply Management said Oct. 1 its manufacturing index dropped to 52.6 in September, lower than the reading of 54 projected by economists in a Bloomberg survey. “As the weakening effects of stimulus measures cloud prospects of a recovery, stocks may move with a softer tone and bonds will firm,” said Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd., a unit of Japan’s No. 4 banking group. Japan’s unemployment rate fell to 5.5 percent from 5.7 percent in July, the statistics bureau said yesterday in Tokyo. None of the 29 analysts surveyed by Bloomberg predicted a decrease. Spending by households unexpectedly rose 2.6 percent from a year earlier, the biggest jump in 19 months. “There are serious concerns of a double-dip recession,” said Hitoshi Tsunetomo, general manager of Shizuoka Bank Ltd.’s treasury department in Tokyo. “Yields are likely to stay low.” Thirty-Year Auction Bond gains were limited before the Ministry of Finance sells 600 billion yen ($6.7 billion) in 30-year debt on Oct. 8. Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds in case prices decline before they can pass on the new securities to investors. The prior 30-year sale on Aug. 6 drew bids worth 3.27 times the amount on offer, compared with a so-called bid-to- cover ratio of 3.87 at the June sale. “The deterioration of the economic outlook may spur talks of additional stimulus from the government,” said Hirokata Kusaba, senior economist in Tokyo at Mizuho Research Institute Ltd. “The anxiety about fiscal conditions may weigh on the longer end of the yield curve.” A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. Banks Buy Notes Japan’s debt burden will probably rise to 197 percent of gross domestic product next year, according to the Organization for Economic Cooperation and Development. The Finance Ministry in April said it will boost bond issuance by 15 percent to 130.2 trillion yen this fiscal year. Five-year notes gained as a slump in demand for corporate loans left lenders with extra money to invest, said Junko Nishioka, chief economist in Tokyo at RBS Securities Japan Ltd. Japanese banks are holding onto some 25 trillion yen to 30 trillion yen of excess cash, according to an estimate by RuiXue Xu, a strategist at RBS Securities Japan Ltd. in Tokyo. The extra yield on 20-year bonds over five-year notes was 1.465 percentage points. The spread on Sept. 16 expanded to 1.48 percentage points, the widest gap in four years. Ten-year yields may drop to as low as 1.1 percent, a level unseen since August 2003, Toshiyuki Kurabayashi, assistant general manager of the fixed-income division at Mitsubishi UFJ Asset, said in an interview on Oct. 1. “The 10-year yield will move in a core range of 1.2 percent to 1.4 percent, and may fall below the 1.155 percent recorded in last December,” Kurabayashi said. “The yield curve is likely to flatten in the seven- to 10-year zones, compared with short- to medium-maturity bonds.” To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net

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