By Theresa Barraclough Nov. 18 (Bloomberg) -- Japan’s 20-year bonds were little changed on speculation some dealers sold the securities to try to increase the coupon at an auction of the debt tomorrow. Ten-year notes earlier fell as technical charts signaled that the drop in 10-year yields toward a one-month low of 1.3 percent was too rapid. Trading today suggests the Ministry of Finance will set a 2.1 percent coupon on the 1.1 trillion yen ($12.3 billion) of new 20-year bonds. “Investors would become very cautious should yields continue to fall so that a 2 percent coupon is set on the 20- year securities,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “It also seems premature for 10-year yields to slip below 1.3 percent.” The yield on the 2.1 percent bond due September 2029 fell half a basis point, or 0.005 percentage point, to 2.05 percent as of 3:02 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.070 yen to 100.704 yen. Twenty-year yields have fallen 8.5 basis points this month and are matching the lowest level since Oct. 14. The previous sale of 20-year debt on Oct. 20 drew bids for 3.02 times the amount on offer, compared with an average so- called bid-to-cover ratio of 3.08 times this year. Ten-year yields also slipped half a basis point to 1.3 percent. Bond futures for December delivery were little changed at 139.30 at the afternoon close at the Tokyo Stock Exchange. ‘Likely to be Sold’ “Bonds are likely to be sold,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., a unit of New York-based Citigroup Inc. Ten-year yields may rise to 1.31 percent today, he said. Yields are likely to climb to 1.44 percent by the middle of next year, according to a Bloomberg survey of economists and analysts with a heavier weighting on more recent forecasts. Should the survey prove accurate, investors who buy the debt today and sell at the end of June would incur a 0.3 percent loss, Bloomberg calculations show. The 10-year yield’s 14-day stochastic oscillator fell to 2.7 yesterday from 12 at the end of last week, below the 20 threshold that signals it may have fallen too quickly and is poised to rise. Similarly, the 14-day relative strength index slid to 38 yesterday from 72 a week ago, approaching the 30 level that signals that recent yield losses were excessive. Deflation, BOJ Demand for bonds was bolstered on speculation deepening deflation will prompt the Bank of Japan to keep interest rates near zero. Policy makers will keep the benchmark overnight rate at 0.1 percent at their two-day meeting starting tomorrow, according to all economists surveyed by Bloomberg News. The difference between rates on five-year notes and inflation-linked debt, which reflects the outlook among traders for consumer prices over the term of the securities, was negative 0.86 percentage point today from minus 0.82 percentage point yesterday. Inflation-adjusted securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation. Deflation, a general drop in prices, enhances the value of the fixed payments from bonds. “Investors ought to remain long on five-year notes,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., one of the 23 primary dealers that are required to bid at government debt sales. “The Bank of Japan will pursue easy monetary policy for a while.” There is a 10 percent chance the central bank will boost borrowing costs by the middle of next year, according to calculations by JPMorgan Chase & Co. using overnight interest- rate swaps. Resistance Level Japan’s 10-year bond futures may rise to 140, the highest level since January, Barclays Bank Plc said, citing charts traders use to forecast prices. The so-called lead futures contract has failed to climb significantly above 140 each of the seven times it has touched the level since April 2008. The highest that futures have climbed during that period was 140.35 in September 2008. “Bonds remain in a bullish trend,” Masafumi Yamamoto, Tokyo-based chief foreign-exchange strategist at Barclays wrote in a report. The trend “may push the contracts to break resistance at 140,” he said, referring to an area where sell orders may be clustered. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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