Oct. 20 (Bloomberg) -- Japan’s government bonds fell for a fourth day, the longest drop in more than two months, after a sale of 1.1 trillion yen ($12.2 billion) in 20-year debt drew the weakest demand since July.

The sale attracted bids worth 3.02 times the amount on offer, less than 3.03 at last month’s auction and the lowest since a ratio of 2.9 at the July sale. Ten-year yields climbed to the highest level in six weeks after the Nikkei newspaper reported that the government may sell a record 50 trillion yen in new bonds next fiscal year, citing comments from an interview with Finance Minister Hirohisa Fujii.

“The auction wasn’t as strong as expected and people were concerned about the possibility of extra bond issuance,” said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “Market participants are quite sensitive about supply-and- demand conditions.”

The yield on the 1.3 percent bond due September 2019 rose one basis point to 1.35 percent as of 4:26 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price declined 0.087 yen to 99.562 yen. The yield is at the highest level since Sept. 8. Twenty-year yields added 2.5 basis points to 2.115 percent.

Ten-year bond futures for December delivery lost 0.21 to 138.62 as of the afternoon close at the Tokyo Stock Exchange.

The lowest price at the sale of the 2.1 percent 20-year bonds was 0.18 yen below the average, compared with a spread of 0.12 at the previous sale last month. The so-called tail is the difference between the lowest and the average price. The shorter the tail, the more bids are clustered around the average price.

Supply Concerns

Kyodo News yesterday reported that bond sales for the year beginning April 1 may not exceed 44 trillion yen, citing the finance minister. Vice Finance Minister Yoshihiko Noda on Oct. 16 said that the government may have to issue additional debt due to a decline in tax revenue to below 40 trillion yen.

“The figures that the newspapers are reporting are far greater than what the market was expecting,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “Renewed concerns of the deteriorating supply-and-demand conditions will weigh on the market. Additional supply is inevitable.”

Declines in bonds were limited on speculation money managers, such as Japan’s life insurance companies, will continue to buy debt and support the market.

Lifer Demand

“Lifers seem to prefer holding longer-term bonds,” said Akitsugu Bandou, a Tokyo-based senior strategist at Okasan Securities Co. Bonds will be supported “by buying demand from lifers and pension funds.”

Sumitomo Life Insurance Co., Japan’s fourth-largest life insurer, last week said it plans to boost holdings of yen- denominated bonds in the fiscal second half, echoing Dai-ichi Mutual Life Insurance Co., the second-largest and Meiji Yasuda Life Insurance Co., the third-largest.

Other debt holders such as Japan Post Holdings Co. may choose to shift away from bonds. The government lender should diversify its investments away from Japanese government bonds and Treasuries, Financial Services Minister Shizuka Kamei was quoted as saying in an interview published today by the Wall Street Journal.

Stock Gains

Demand for government bonds also waned as optimism over the global economy and better-than-expected earnings bolstered stocks worldwide. The Nikkei 225 Stock Average advanced 1 percent today in Tokyo, after the Standard & Poor’s 500 Index increased 0.9 percent yesterday.

Benchmark 10-year yields had a correlation of 0.83 with the Nikkei 225 since Sept. 30, compared with a relationship of 0.24 last month, according to Bloomberg data. A value of 1 means the two moved in lock step.

Japanese bonds maturing in 10 or more years have handed investors a loss of 2.7 percent so far this year, indexes compiled by Merrill Lynch & Co. show. That compares with a 17 percent gain in the Nikkei 225 in the same period.

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

Last Updated: October 20, 2009 03:41 EDT