By Theresa Barraclough Oct. 19 (Bloomberg) -- Japanese government bonds declined for a third day, the longest slide in a month, on speculation the government will issue additional debt to compensate for a possible decline in tax revenue. Ten-year yields climbed to a four-week high on concern the Democratic Party of Japan will fail to keep debt sales below this year’s record 44.1 trillion yen ($485.5 billion) as the nation’s debt burden approaches 200 percent of gross domestic product. Primary dealers, which are obliged to bid at tomorrow’s 1.1 trillion yen sale in 20-year bonds, may try to reduce their debt holdings to protect against potential losses at the auction. “Pressure on the government to issue additional debt is strengthening,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., one of 23 primary dealers. “It is drawing up the supplementary budget, while ascertaining the extent of the economy’s recovery. This is JGB negative.” The yield on the 1.3 percent bond due September 2019 rose half a basis point to 1.335 percent, the highest since Sept. 18, as of 12:59 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.044 yen to 99.693 yen. Ten-year yields may climb to 1.34 percent today, according to UBS’ Dohke. Ten-year bond futures for December delivery lost 0.07 to 138.81 at the Tokyo Stock Exchange. Japanese Prime Minister Yukio Hatoyama said on Oct. 14 the government may need to consider issuing more bonds as it assesses a possible decline in tax revenue. Debt sales for the fiscal year that begins April 1 may not exceed 44 trillion yen, Finance Minister Hirohisa Fujii said, Kyodo News reported today. 1.3 Percent Government bonds in Japan have handed investors a loss of 0.2 percent so far this year, according to Merrill Lynch & Co. indexes, as the government stepped up debt sales to finance fiscal stimulus packages aimed at stimulating demand. Unemployment is near a record high and some economists say it hasn’t peaked, as companies including Japan Airlines Corp. cut jobs even as the economy recovers. Fifteen months of wage declines are also likely to discourage consumers from spending. “Even though there are concerns surrounding the economy, yields will not decline below 1.3 percent unless the fiscal issue settles,” said Takafumi Yamawaki, senior strategist in Tokyo at BNP Paribas Securities Japan Ltd. Declines in bonds were limited as the Nikkei 225 Stock Average lost 0.5 percent, snapping a two-day gain, after the Standard & Poor’s 500 Index slipped 0.8 percent. 20-Year Sale Benchmark 10-year yields had a correlation of 0.77 with the Nikkei 225 in the past month, compared with a relationship of 0.22 the prior four-week period, according to Bloomberg data. A value of 1 means the two moved in lock step. “The increase in overseas bonds and the decline in local stocks is adding to buying factors,” said Keiko Onogi, a debt strategist in Tokyo at Daiwa Securities SMBC Co., a unit of Japan’s No. 2 brokerage. Daiwa Securities is a primary dealer. Pre-auction trading suggests the finance ministry will set a 2.1 percent on the 20-year securities to be sold tomorrow, the same coupon amount as the previous auction in September. The prior sale of 20-year debt on Sept. 15 attracted bids worth 3.03 times the amount on offer, compared with a so-called bid-to-cover ratio of 3.42 times at the August offering. “We’re in a selling trend,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “Given the 20-year bond auction tomorrow, the super-long yields may be under pressure to rise, steepening the yield curve.” The difference in yields between five- and 20-year debt expanded to 1.48 percentage points on Oct. 16, approaching the widest gap since August 2005, data compiled by Bloomberg showed. A basis point is 0.01 percentage point. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

Source