Japan’s Yields to Reach 17-Month High Next Quarter

Japan’s 10-year bond yields may rise to the highest since October 2008 next quarter, following seasonal patterns where they climb on speculation U.S. interest rates will increase, Mizuho Securities Co. said.

“The tendency of Japan’s long-term yields to gain in the April-June period will remain intact this year,” said Hajime Takata, Tokyo-based chief strategist at Mizuho. “It wouldn’t be surprising if the yields rose above 1.6 percent.”

The yield on Japan’s 10-year notes rose in the second quarter of each of the past six fiscal years, according to data compiled by Bloomberg. The rate peaked between April and June in all those periods except for fiscal 2005. In the current year ending on March 31, the yield reached a high of 1.56 percent on June 11.

The U.S. outlook is the main factor driving the seasonal pattern, Takata said. Inflation expectations and recovery optimism in the world’s largest economy have tended to heighten in the second quarter of each year since 2004, prompting Japan’s yields to gain amid speculation the Federal Reserve would tighten monetary policy, he said.

Japan’s 10-year bonds headed for a fourth weekly loss, pushing up the yield to 1.38 percent as of 11:15 a.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The U.S. 10-year Treasury yield was at 3.86 percent, near to the highest since June 11, according to data compiled by Bloomberg.

Recent economic indicators signal a recovery is taking hold in the U.S., aiding a rally in stocks that will likely help to improve investor sentiment, Takata said.

“From April, the speculation about tightening will push up U.S. two-year yields and 10-year yields will likely rise above the key 4 percent level,” he said.

Still, the Fed probably will delay interest-rate increases until next year or 2012, Takata said.

“It’s highly likely U.S. yields will reverse to a decline from the summer as they did in the past few years,” he said. “Japan’s long-term yields will move in a range below 1.5 percent after temporary gains.”

Japan Bonds Fall, Post 4th Weekly Loss on Stock Gains, Recovery

Japan’s 10-year bonds dropped for a second day, completing a fourth weekly loss, as the yen’s slide to its lowest since January bolstered exporters’ stocks.

Ten-year yields climbed to the highest level since November after Treasuries dropped yesterday, boosting U.S. rates to the most since June. Demand for bonds was also limited on speculation the Bank of Japan’s key survey of business confidence and U.S. nonfarm payrolls next week will add to signs the global economy is recovering.

“Japanese and U.S. yields are to test the higher end of their ranges,” said Shinji Nomura, chief debt strategist in Tokyo at Nikko Cordial Securities Inc., part of Japan’s third- largest banking group. “Optimism over the BOJ’s Tankan and U.S. nonfarm payrolls next week are negative factors for bonds.”

The yield on the 1.4 percent security maturing in March 2020 increased 1.5 basis points, or 0.015 percentage point, to 1.375 percent as of 4:13 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price dropped 0.132 yen to 100.219 yen.

Benchmark yields, which ended last week at 1.36 percent, earlier increased to 1.385 percent, the highest since Nov. 12.

Ten-year Treasury yields reached 3.92 percent yesterday, the highest since June 11. They were at 3.86 percent today.

Futures MACD

Ten-year bond futures for June delivery dropped 0.23 to 138.33 as of the afternoon close at the Tokyo Stock Exchange. The contracts earlier touched 138.16, the lowest since November. The contracts’ moving average convergence/divergence, or MACD, was minus 0.2719 today, below the so-called signal line of minus 0.1569, suggesting that they are in a downtrend.

The Nikkei 225 Stock Average advanced 1.6 percent, damping demand for the refuge of government debt.

Shares gained after Japan’s currency touched 92.96 yen yesterday, the weakest level since Jan. 8. It traded at 92.57 yen per dollar today, after falling for the past three days.

Japanese bonds were little changed on the month and quarter, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. The Nikkei 225 gained 8.6 percent so far this month, advancing 4.3 percent this quarter.

Bond losses were tempered on expectations lingering deflation will increase the value of coupon payments.

Japan’s consumer prices excluding fresh food slid 1.2 percent in February from a year earlier, after dropping 1.3 percent in each of the past two months, the statistics bureau said today in Tokyo.

Lingering Deflation

“An end to deflation isn’t in sight anytime soon, though the pace of price declines will moderate gradually,” Azusa Kato, economist at BNP Paribas in Tokyo, said before the data.

The difference between yields on five-year notes and similar maturity inflation-linked debt, which reflects the outlook for consumer prices over the term of the securities, was negative 1.05 percentage points today, compared with minus 0.85 percentage points at the end of last year.

Inflation-adjusted securities typically yield less than regular bonds because their principal payments increase at the same rate as inflation.

Ten-year yields may rise to the highest since October 2008 next quarter, following seasonal patterns where they climb on speculation U.S. interest rates will increase, Mizuho Securities Co. said.

Yield Outlook

“The tendency of Japan’s long-term yields to gain in the April-June period will remain intact this year,” said Hajime Takata, Tokyo-based chief strategist at Mizuho. “It wouldn’t be surprising if the yields rose above 1.6 percent.”

The yield on Japan’s 10-year notes increased in the second quarter of each of the past six fiscal years. The rate peaked between April and June in all those periods except for fiscal 2005. In the current year ending on March 31, the yield reached a high of 1.56 percent on June 11.

Recent economic indicators signal a recovery is taking hold in the U.S., aiding a rally in stocks that will likely help to improve investor sentiment, Takata said.

A U.S. report on April 2 will show payrolls rose 187,000 in March after dropping 36,000 the previous month, according to the median estimate of economists surveyed by Bloomberg.

Japan’s Tankan business confidence index will improve to minus 14, from December’s minus 24, according to the median estimate of economists in a Bloomberg News survey before the April 1 report. That would be the best reading since December 2008.

Petrobras Sees $25 Billion Share Sale

Petroleo Brasileiro SA, Brazil’s state-controlled oil company, estimates it may raise $15 billion to $25 billion from minority shareholders in a planned share sale, Chief Executive Officer Jose Sergio Gabrielli said.

The estimate is part of simulations to forecast the company’s debt in coming years, he said today on a conference call with analysts and investors.

“It was only an exercise,” he said. “Any estimate at this moment for the capital increase is mere speculation.”

Petrobras plans to invest between $200 billion and $220 billion in five years to tap Tupi, the Americas’ biggest crude find since Mexico’s Cantarell in 1976, and other discoveries. The plan depends on approval of the share sale by lawmakers, Gabrielli said.

The bill allowing the share sale is one of four proposals President Luiz Inacio Lula da Silva sent to Congress last year to govern the country’s oil reserves in the pre-salt area off Brazil’s southeastern coast. The offering also involves giving new shares to the government in return for oil reserves.

Gabrielli said the company expects final approval in Congress and a presidential sanction of Brazil’s new oil regulation by June 4. The company will need to seek an “alternative” if Congress doesn’t approve the offering, he said, without elaborating.

Petrobras expects to begin producing 100,000 barrels a day in October at Tupi, Gabrielli said. He also said the company has had “good results” drilling one well owned by the government as part of the oil-for-shares plan.

Petrobras rose 1.2 percent to 36.25 reais in Sao Paulo trading at 11:54 a.m. New York time. Earlier it gained 2.1 percent, the most since March 9.

Citizens Taps Market With Yields Low and Storms on the Rise

Citizens Property Insurance Corp., largest real-estate insurer, starts marketing $2 billion in tax-exempt senior bonds to institutional investors with attractive yields amid reports of a high hurricane season.

After a below-average hurricane season in 2009, this year’s projection compares with several years when the eastern U.S. and Gulf coasts were badly hit, according to Accuweather.com chief long-range meteorologist whose official was released March 14. Five hurricanes are predicted, with two or three being major landfalls, Bastardi said.

Citizens yesterday was offering yields ranging from 2.83 percent for three-year debt to 4.45 percent for 2017 maturities, the chief executive officer of Asset Preservation Advisors, an Atlanta-based firm that invests $1.4 billion in municipal bonds. Yesterday was the second day of retail sales for the insurance fund.

The borrower is taking advantage of the low yields being paid for similar maturities relative to Treasuries, Woods said. Three-year, tax-exempt general obligations with a AAA credit rating, offer a yield that is 58 percent of comparable Treasuries, according to data compiled by Bloomberg. In April when Citizens last came to market, the ratio was 91 percent of the equivalent Treasury. The note yesterday paid 87 basis points compared with 151 basis points on the three-year sovereign.

“The yields they are talking about in the long end are not that attractive given the risk,” Woods said. “That part of the yield curve is very, very expensive.”

Finance for Claims

The issue, which includes short-term notes as well as floating-rate securities, will provide financing to pay claims during the 2010 hurricane season. Underwriters led by JPMorgan Chase & Co. are marketing the securities, which are rated A+ by Standard & Poor’s, the fifth-highest of 10 investment grades, and A2 by Moody’s Investors Service, the sixth-highest.

“Strong retail orders to set the stage for the day of institutional pricing is very important to us,” Citizens’ chief financial officer. “Last year retail comprised a meaningful amount of the total.”

Yields on top-rated general obligations maturing in seven years rose two basis points yesterday, according to a daily survey by Concord, Massachusetts-based Municipal Market Advisors. The 2.37 percent is three basis points above the all- time low. A basis point equals 0.01 percentage point.

“The municipal market is primed for a good rally,” a money manager with New York’s AllianceBernstein LP, which oversees $30 billion in municipal bonds. “I think the market will rally in the coming months as supply diminishes and pressure for higher tax rates continues to build.”

Following are descriptions of pending sales of municipal debt in the U.S.:

plans to sell $897.8 million in tax-exempts tomorrow secured by a senior lien on the revenue of Los Angeles International Airport, according to S&P. LAX is the world’s seventh-busiest airport by passenger traffic, one rank lower than a year ago, Airports Council International said March 17. Proceeds will help fund a $5.6 billion capital improvement plan. The department will issue about $1.9 billion in additional securities after this sale, S&P said. Underwriters led by Siebert Brandford Shank & Co. LLC will market the bonds to investors. S&P and Fitch rated the debt AA and Moody’s assigned Aa3. (Updated March 23)

plans to market $850 million in tax-exempt, fixed-rate bonds March 25. The monopoly power utility will back them with net revenue from the system, Moody’s said. The tax-exempts are the first in a series of sales totaling $1.9 billion, S&P said. Proceeds will help pay down outstanding lines of credit, refinance existing debt and help pay for a capital investment program, S&P said. The securities will be marketed by JPMorgan Chase & Co. and are rated BBB+, the third-lowest investment grade, by Fitch Ratings and S&P, and one notch higher, A3, by Moody’s. (Updated March 23)

CHICAGO TRANSIT AUTHORITY, which manages the second-largest public transportation system in the U.S., plans to sell $550 million in sales-tax revenue bonds today to help finance train upgrades. The CTA will acquire 406 new cars to replace equipment that’s 30 to 40 years old, according to the agency. The total cost of the purchase will be $674 million, the CTA said. Additional funding will come from the Federal Transit Administration and the Illinois Department of Transportation. Underwriters led by Goldman Sachs Group Inc. will market the securities, including $475 million in Build America Bonds. CTA debt is rated A1 by Moody’s and AA by S&P. (Updated March 23)

with nine academic locations and six health institutions, plans to sell $373.3 million of fixed-rate revenue bonds today. Proceeds from the tax-exempts will refinance outstanding debt. The Austin-based system sold $331.4 million of tax-exempt securities last week with yields ranging from 0.66 percent on notes maturing in 2012 to 3.5 percent on those due in 2024. They will be marketed by RBC Capital Markets, a unit of Royal Bank of Canada. The securities are rated AAA by S&P and Fitch, and Aaa by Moody’s. (Updated March 23)