Nov. 4 (Bloomberg) -- Japan's 10-year bonds fell by the most in a week on speculation primary dealers sold the debt to protect against potential losses at an auction tomorrow.

The notes also declined as the Nikkei 225 Stock Average rose for the fourth time in five days following interest-rate cuts by Asian central banks, reducing demand for the safety of fixed income. Japan's Ministry of Finance will offer 1.9 trillion yen ($19.2 billion) in the securities, which will be a record if all the notes on offer are taken up.

``There's a lot of concern surrounding tomorrow's 10-year auction,'' said Keiko Onogi, a Tokyo-based debt strategist at Daiwa Securities SMBC Co., one of 24 primary dealers that are required to bid at government auctions. ``A rise in stocks is causing sales in bond futures.''

The yield on the 1.5 percent bond due September 2018 rose 2.5 basis points to 1.505 percent as of 4:28 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.215 yen to 99.957 yen.

Ten-year bond futures for December delivery lost 0.15 137.83 as of the afternoon close at the Tokyo Stock Exchange. A basis point is 0.01 percentage point.

Japanese markets were closed yesterday for a public holiday.

Pre-auction trading suggests the Ministry of Finance will set a 1.5 percent coupon on the 10-year securities, the same as the previous sale in October, when the government offered 1.9 trillion yen and only managed to sell about 1.74 trillion yen.

The Oct. 2 sale drew bids worth 2.58 times the amount on offer, compared with a so-called bid-to-cover ratio of 2.66 in September. Last year's average was 3.05 times.

Stocks `Settling'

The Nikkei 225 gained 6.3 percent after the MSCI Asia Pacific excluding Japan Index rose for a fifth day yesterday, the longest winning streak since May 19.

``Stocks seem to be settling and the investment stance of investors has changed on the rate cuts,'' said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., a Japanese unit of the world's biggest bank by assets.

Australia's central bank lowered its benchmark interest rate by 75 basis points to 5.25 percent today, more than the 50-point cut economists had predicted. The European Central Bank and Bank of England both meet on Nov. 6 and are forecast to reduce rates, according to surveys by Bloomberg.

The Reserve Bank of India on Nov. 1 lowered its repurchase rate for the second time in two weeks following cuts in Japan, China, South Korea and Taiwan.

Two-Year Notes

``Two- and five-year bonds are easier for investors to buy because of the rate cut,'' said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets.

The difference between the Bank of Japan's lending rate and the two-year yield widened to about 25 basis points, from 9 basis points on Oct. 30, the day before the central bank lowered borrowing costs to 0.3 percent from 0.5 percent, according to data compiled by Bloomberg.

Given the wider spread, two-year notes are looking relatively attractive, Nishimura said.

The slowdown in the U.S. economy will drag on global growth and support demand for debt, according to Eiji Dohke at UBS Securities Japan Ltd.

A U.S. industry report yesterday showed manufacturing contracted in October at the fastest pace since 1982, further signs the economy is headed for a recession as the credit crisis deepens.

Debt Supply

Evidence that Japan, the world's second-largest economy, is faltering, mounted since the start of last month. Exports climbed 1.5 percent in September, less than half of what economists expected, and industrial production tumbled for a third quarter. Reports on Oct. 31 showed inflation eased and household spending fell for a seventh month.

``The financial sector and the economy will continue deteriorating,'' said Dohke, chief strategist at UBS Securities in Tokyo. Investors ought to buy bonds, he said.

Demand for longer-dated notes fell on concern that the government will raise debt sales to pay for an economic stimulus package, said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., another primary dealer. Twenty-year yields added 2.5 basis points to 2.145 percent.

Japanese Prime Minister Taro Aso on Oct. 30 promised to pump 5 trillion yen into the economy. He pledged 2 trillion yen in financial assistance for families and 1 trillion yen for local authorities. The government will also help ensure small businesses can access loans and offer tax relief on mortgages, Aso said. Parliament approved a 1.8 trillion yen supplementary budget to fund the first stimulus package on Oct 16.

``An increase in issuance and less demand from public institutions creates negative supply and demand dynamics,'' said Ichikawa.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

Last Updated: November 4, 2008 02:31 EST