Japanese bond futures approached a two-month low on speculation primary dealers will cut their debt holdings to prepare for a 1.1 trillion yen ($13.2 billion) sale of 20-year securities tomorrow. Ten-year bonds dropped for the first time in three days before a U.S. report tomorrow forecast to show a gauge of consumer confidence in the world’s largest economy was near a three-year high, reducing the allure of fixed payments from debt. Demand may wane at the auction as the extra yield offered by 20-year bonds over 10-year notes has narrowed to 74.5 basis points from this year’s high of 83 basis points last month. “The market is likely to remain soft before the auction of 20-year debt,” said Makoto Yamashita, chief rate strategist at Deutsche Bank AG’s brokerage unit in Japan. “Investors aren’t inclined to buy with 10-year yields at around 1.3 percent.” Ten-year futures for March delivery fell 0.02 to 139.00 as of 1:33 p.m. on the Tokyo Stock Exchange. The contracts fell to 138.32 on Feb. 9, the lowest since Dec. 15. The yield on the 10-year bond rose half a basis point to 1.30 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.2 percent security due December 2020 lost 0.043 yen to 99.129 yen. The 20-year yield was unchanged at 2.045 percent. The previous sale of 20-year bonds on Jan. 20 drew bids for 4.46 times the amount on offer, compared with a so-called bid- to-cover ratio of 3.52 in December. Primary dealers often reduce holdings of bonds before an auction in case prices decline before they can pass on the new securities to investors. 20-Year Auction The Conference Board’s index of U.S. consumer confidence was 65 this month, according to a Bloomberg survey before tomorrow’s report. The reading was 65.6 in January, the highest level since March 2008. U.S. financial markets are shut today for a holiday. “Confidence in the economic recovery is strong, especially in the U.S.,” said Shuntaro Take, deputy general manager for corporate investment at Tokio Marine & Nichido Life Insurance Co., which manages the equivalent of $40 billion in assets. “There are few catalysts that prompt investors to buy bonds.” The decline in bonds was tempered on speculation widening unrest in the Middle East will spur demand for safer assets. Arab governments are cracking down on pro-democracy activists as uprisings that toppled leaders in Tunisia and Egypt spread to Libya, Algeria, Yemen and Bahrain. Libya’s Saif al- Islam Qaddafi called on protesters to engage in dialogue or face a civil war that risks “hundreds of thousands of dead,” as a widening revolt posed the most serious challenge to his father’s 41 years of rule. “With unrest unfolding in oil-producing countries, there is a risk that oil prices will rise,” Tokio Marine’s Take said. “It should be a positive for Japanese bonds, as I see a chance that the world’s economy will cool.” To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Nobuyuki Akama in Tokyo at akam@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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