Nov. 14 (Bloomberg) -- Japan's 10-year bonds fell, paring a weekly advance, as gains in stocks reduced demand for the relative safety of government debt.

Ten-year yields climbed from near the lowest in a week as the Nikkei 225 Stock Average snapped three days of losses. U.S. shares surged yesterday as investors bought the cheapest energy- related shares on record after oil reached the lowest since January 2007. Demand for longer-dated bonds also waned on concern the government will sell more debt to fund plans to boost economic growth.

``Bonds will follow overseas markets and test lower prices,'' said Akihiko Inoue, an analyst in Tokyo at Mizuho Investors Securities Co., one of the 24 primary dealers required to bid at government debt sales. ``Concern of additional issuance is strong and'' investors are in no rush to buy bonds.

The yield on the 1.5 percent bond due September 2018 advanced 2 basis points to 1.5 percent as of the 11:05 a.m. morning close in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.171 yen to 100 yen. The yield is still down 1 basis point this week.

Twenty-year yields rose 2 basis points, or 0.02 percentage point, to 2.14 percent. Ten-year bond futures for December delivery lost 0.22 to 138 at the Tokyo Stock Exchange.

The Nikkei 225 advanced 4.3 percent as investors were attracted to local equities after the benchmark lost 34 percent in the past three months. U.S. stocks rallied the most in two weeks, with the Standard & Poor's 500 Index jumping 6.9 percent, led by energy and real-estate companies.

Japan's bonds typically move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.7 with the Nikkei this month, according to data compiled by Bloomberg. A value of 1 would mean the two moved in lockstep.

`Deepening Recession'

The decline in bonds may be limited before a government report next week that economist say will show the economy remained at a standstill in the third quarter.

``The deepening recession, emerging speculation of deflation risk and declining risk-taking ability of financial institutions should outweigh supply concerns,'' Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp., wrote in a report to clients yesterday. ``Banks will have little choice but to boost investments in safe assets like JGBs.''

Gross domestic product was unchanged in the three months ended Sept. 30, according to the median estimate of economists surveyed by Bloomberg News before the government report Nov. 17. The world's second-largest economy contracted 3 percent in the previous quarter.

Deflation Signs

Inflation-linked bonds worldwide are yielding more than conventional debt, signaling the global economy faces the risk of deflation.

The extra yield 10-year conventional Japanese bonds offer compared with similar-maturity inflation-linked debt, known as the breakeven rate, was at minus 158 basis points today, according to data compiled by Bloomberg.

The U.S. five-year breakeven rate was minus 48 basis points and the three-year U.K. breakeven spread was minus 33 basis points yesterday. A negative breakeven inflation rate reflects investor expectations for declining consumer prices over the life of the security.

Japanese lawmakers last month approved a 1.8 trillion yen ($18.5 billion) supplementary budget as part of a stimulus package to spur economic growth. Prime Minister Taro Aso Oct. 30 promised to pump an additional 5 trillion yen into the economy.

The Ministry of Finance will today hold a regular meeting with the 24 primary dealers in Tokyo to discuss its plans for next year's debt sales.

A ``couple of trillion yen'' of extra bond sales ``is fine, but a two-digit figure will have a negative impact on the Japanese market,'' said Yuuki Sakurai, general manager of financial and investment planning at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets in Tokyo.

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

Last Updated: November 13, 2008 21:13 EST