Japan\'s bonds decline as political divisions widen

Japan\'s ten-year bonds declined as widening political divisions dimmed prospects Prime Minister Naoto Kan will be able to carry out planned fiscal changes. Bond futures pared gains from a six-month high as Kan\'s pledge to step down set off a contest to select Japan\'s next leader. Kan survived a no-confidence vote in parliament on June 2 after appeasing Democratic Party of Japan rebels with an offer to resign once a crisis following the nation\'s biggest earthquake is resolved. The Ministry of Finance will sell 700 billion yen (Dh32 billion) in 30-year bonds on June 7. Overvalued \"Ten-year bonds with yields below 1.2 per cent are overvalued,\" said Ayako Sera, a strategist at Sumitomo Trust & Banking Co. in Tokyo, which manages the equivalent of $306 billion (Dh1.1 billion). \"Political turmoil is negative for Japanese bonds.\" The ten-year yield added one basis point last week to 1.13 per cent on Friday in Tokyo at Japan Bond Trading Co, the nation\'s largest interdealer debt broker. The 1.2 per cent securities due June 2021, which were auctioned to investors on June 1, traded at 100.628 yen. Ten-year bond futures for June delivery rose 0.18 on the week to 141.06 at the Tokyo Stock Exchange. The contracts touched 141.18 on June 2, the highest since December 7. Lawmakers at the ruling DPJ are divided over the timeframe for Kan\'s resignation, with his predecessor saying it could be by month-end and the prime minister suggesting it might not be until early next year. As Kan \"tries to keep his premiership longer, political uncertainty has increased,\" Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co., wrote in a research note yesterday. Production up Ten-year yields jumped three basis points on May 31, the most since April 6, after a government report showed industrial production increased in April. Factory output gained 1 per cent from March, when it plunged 15.5 per cent following the unprecedented earthquake on March 11 that triggered a deadly tsunami, the Trade Ministry said.