By Yoshiaki Nohara Aug. 6 (Bloomberg) -- Japanese bond futures fell to match a six-week low as the Nikkei 225 Stock Average rose the most this week, damping demand for the relative safety of government debt. Ten-year futures also declined for the third time in four days after a government report showed a composite of economic indicators including factory production and retail sales advanced for a third month, encouraging investors to buy higher- yielding assets. Thirty-year bonds gained after a 600 billion yen ($6.33 billion) auction of the securities drew more demand than some traders expected. “Rising stocks are weighing down on bonds,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “Today’s government report showed Japan’s economy probably has hit the bottom and is heading for a recovery.” Ten-year bond futures for September delivery declined 0.14 to 137.55 at the 3 p.m. close on the Tokyo Stock Exchange. The contract fell as low as 137.45, equaling the least since June 24. The yield on the benchmark 10-year bond was unchanged at 1.435 percent as of 4:52 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 1.5 percent security due June 2019 held at 100.561 yen. Economic Health Bond futures fell and stocks rose after the Cabinet Office said the coincident index, the government’s broadest measure of economic health, advanced to 87.8 in June from 87.1 in May. The Nikkei 225 climbed 1.3 percent to 10,388.09, extending its gain to 47 percent from a 26-year low in March. “Japanese stocks have stayed above 10,000 for a while, reflecting an improving outlook for the global economy,” said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “Rising risk appetite is weighing down on bonds.” Thirty-year debt gained for a second day after an auction of the securities today drew a lowest price of 99.65 yen, higher than the 99.60 predicted by 13 traders surveyed by Bloomberg. The yield on the already issued 30-year bond fell one basis point to 2.31 percent. “It was a strong, good auction, boosting demand for longer-dated securities,” said Shinji Ebihara, a quantitative analyst in the fixed-income research department at Mizuho Securities Co. in Tokyo. “Demand for high yields overcame concern about surging debt sales.” The government is planning to sell a record 130.2 trillion yen in bonds this fiscal year to help pay for 25 trillion yen in stimulus measures. Japan’s bonds maturing in more than 10 years have handed investors a loss of 1.5 percent since April 1, according to indexes compiled by Merrill Lynch & Co. Curve Flattens Shorter-maturity bonds declined, while longer-term ones gained, causing the so-called yield curve to flatten. The difference in yields, or spread, between two- and 30-year securities narrowed to 2.04 percentage points from 2.055 percentage points yesterday. “The good auction results made investors feel comfortable to buy the longer end and their post-auction buying in the 30- year and 20-year lifted the sector,” said RuiXue Xu, a rates strategist in Tokyo at RBS Securities Japan, one of the 23 primary dealers required to bid at government auctions. A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It flattens when yields on shorter-maturity notes rise, those on longer-dated bonds fall, or both happen simultaneously. To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

Source