By Yoshiaki Nohara Jan. 20 (Bloomberg) -- Japanese bonds fell, pushing yields to a one-week high, on speculation primary dealers cut their holdings to prepare for a sale of 20-year securities tomorrow. Investors may seek to push down prices to boost the coupon at tomorrow’s 1.1 trillion yen ($12.1 billion) auction, said Katsutoshi Inadome, a strategist at Mitsubishi UFJ Securities Co. The coupon was 2.1 percent at the last six sales of the securities. The so-called yield curve steepened before tomorrow’s auction, with the difference in yield between five- and 20-year bonds approaching the widest since 2001. “Investors want to make adjustments to get a 2.2 percent coupon for the auction, which I think would be the minimum level to secure good demand,” said Inadome at the unit of Japan’s largest banking group in Tokyo. “They want to be cautious as the supply-demand condition isn’t good for 20-year bonds.” The yield on the benchmark 10-year bond rose half a basis point to 1.33 percent as of 3:01 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due December 2019 fell 0.044 yen to 99.737 yen. The yield earlier touched 1.335, the highest since Jan. 14. Twenty-year yields climbed half a basis point to 2.145 percent. They reached 2.155 percent yesterday, the highest level since Jan. 14. Ten-year futures for March delivery declined 0.06 to 139.15 at the afternoon close on the Tokyo Stock Exchange. Previous Sale The previous 20-year sale on Dec. 15 drew bids for 2.4 times the amount on offer, down from a so-called bid-to-cover ratio of 3.1 in November. The last time the Finance Ministry set a 2.2 percent coupon was June 2009. Primary dealers who are required to bid at government debt sales often reduce holdings of bonds before an auction in case prices drop before they can pass on the new securities. Should the coupon increase to 2.2 percent, “investors such as life insurers would boost demand, easing concern about the auction,” said Makoto Yamashita, chief Japan interest-rate strategist at Deutsche Securities Inc. in Tokyo. The decline in bonds was tempered on speculation the central bank will keep adding funds to the financial system to ensure borrowing costs remain low to spur the economic recovery. The Bank of Japan introduced a 10 trillion yen credit program last month after Finance Minister Naoto Kan urged policy makers to ease monetary policy when he was economy minister. There are “still various policy measures that could be taken” by the central bank and the government, Kan said Jan. 14. ‘Additional Easing’ “The market’s attention may switch back to the pressure on additional easing,” Tetsuya Miura, chief market analyst in Tokyo at Mizuho Securities Co., wrote in a research note today. “The sentiment can change easily with the BOJ policy meeting next week.” The central bank starts its next two-day policy meeting on Jan. 25. The benchmark interest rate will remain at 0.1 percent through 2010, analysts forecast in a Bloomberg News survey. The difference in yield between 5- and 20-year debt increased one basis point to 1.64 percentage points today. That spread reached 1.65 percentage points on Jan. 7, the widest since July 2001. A basis point is 0.01 percentage point. 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. To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

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