Jan. 26 (Bloomberg) -- Japan's five-year bonds fell, staging the biggest loss in 19 months, after stocks jumped and the inflation rate doubled to the fastest in almost a decade.
The notes had the steepest weekly decline since September, as exporters gained on confidence a U.S. stimulus package and an emergency Federal Reserve interest-rate cut earlier this week will halt a slowdown in Japan's largest overseas market. A report yesterday showed Japan's core consumer prices, which exclude fresh food, rose 0.8 percent last month from a year earlier, tempering speculation the central bank will lower rates.
``This is the end of the panicky phase,'' Takashi Nishimura, an analyst at Mitsubishi UFJ Securities in Tokyo, said yesterday. ``The JGB market is mainly influenced by the recovery of stock markets, which means bonds will fall.''
The yield on the 0.9 percent note maturing in December 2012 climbed 9.5 basis points to 0.91 percent yesterday, the biggest increase since June 2006, at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.446 yen to 99.953 yen. The yield has added 5 basis points this week. A basis point is 0.01 percentage point.
The yield on the 10-year benchmark bond has increased 9 basis points to 1.48 percent in the same period, the biggest weekly gain in yields since December.
Ten-year bond futures for March delivery lost 0.90 yesterday to 137.36 at the afternoon close at the Tokyo Stock Exchange and the Nikkei 225 Stock Average jumped 4.1 percent. The S&P 500 Index advanced 1 percent on Jan. 24.
The risk of companies and governments in the Asia-Pacific region defaulting on their debt fell this week, erasing earlier increases to record highs.
Rising Energy Costs
There is about a 9 percent probability the BOJ will lower its benchmark 0.5 percent interest rate by a quarter-percentage point at its March meeting, according to Bloomberg calculations using Credit Suisse Group prices for overnight interest-rate swaps. The odds fell from around 20 percent on Jan. 23.
``Shorter-end debt dropped at a faster pace because some people reduced bets on a BOJ rate cut,'' said Daisuke Uno, chief fixed-income and currency strategist at Sumitomo Mitsui Banking Corp. in Tokyo. ``The inflation data won't change the long-term economic outlook, so losses in longer debt were limited.''
Ten-year yield will fall to 1.25 percent by the end of March and 1 percent by the end of June, Uno said.
Breakeven Rate
The difference in yields between five- and 20-year debt narrowed to about 1.24 basis points yesterday, compared with the closing spread of 1.27 percentage points on Jan. 24, according to data compiled by Bloomberg. The yield on the 20-year security gained 6.5 basis points to 2.15 percent.
The extra yield paid by 10-year conventional government debt compared with similar-maturity inflation-linked bonds was little changed at about 30 basis points yesterday from Jan. 24, according to data compiled by Bloomberg.
The so-called breakeven inflation rate reflects investors' expectations for average annual increases in consumer prices over the next decade.
The Markit iTraxx Japan index fell 8 basis points to 59 basis points, Morgan Stanley prices show. The contracts declined from 91 basis points earlier this week, the highest since the credit-default swap indexes started in September 2004.
``The strong pessimistic view over the global economic outlook, which boosted bonds recently, has eased,'' said Hajime Takata, chief bond strategist in Tokyo at Mizuho Securities Co.
Ten-year yields may rise to 1.44 percent by the end of March, according to the weighted average forecast of a Bloomberg News survey of economists and analysts. The estimate puts a heavier weighting on more recent forecasts.
Credit-default swaps, financial instruments based on bonds or loans, were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities should the borrower default. A decrease in the price indicates improving investor perceptions of credit quality and an increase suggests deterioration.
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