Nov. 18 (Bloomberg) -- Japan's five-year government notes rose for a fourth day as local stocks declined after a U.S. manufacturing report added to evidence that the global economy is heading toward a recession.

Five-year yields fell toward the lowest level since April after the Federal Reserve Bank of New York said regional manufacturing contracted at the fastest pace on record. A report yesterday showed Japan's economy entered its first recession since 2001. Notes also gained on speculation banks will have more money to invest in the market after the Bank of Japan changed policies to increase liquidity in the financial system.

``Weakness in stocks is supportive for JGBs,'' said Keiko Onogi, a debt strategist at Daiwa Securities SMBC Co., one of the 24 primary dealers that are required to bid at auctions, in Tokyo. ``Should the BOJ successfully provide money into the market, there is more downside room for JGB yields.''

The yield on the 1 percent note due September 2013 fell half a basis point to 0.865 percent as of 10:41 a.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.023 yen to 100.625 yen. The yield is 2.5 basis points shy of matching the lowest since April 15. A basis point is 0.01 percentage point.

Five-year yields may fall to as low as 0.75 percent by year-end, Daiwa's Onogi said. Should her predictions prove accurate investors will make about a 0.6 percent return, according to Bloomberg calculations.

Ten-year bond futures for December delivery rose 0.04 to 138.60 at the Tokyo Stock Exchange. The Nikkei 225 Stock Average lost 1.5 percent and the MSCI Asia Pacific Index slid 1 percent.

Stock Correlation

Bonds often move in the opposite direction to regional stocks. Japan's benchmark 10-year yields had a correlation of 0.79 with the MSCI Index this month, according to Bloomberg data. A value of 1 means the two moved in lockstep.

Japan's government bonds have handed investors a return of about 0.3 percent in the past week through yesterday, according to indexes compiled by Merrill Lynch & Co. The Nikkei declined 3.3 percent in the same period.

The measure of manufacturing in New York fell to minus 25.4, the lowest since records began in 2001, from minus 24.6 percent in October. Japan's gross domestic product shrank an annualized 0.4 percent in the three months ended Sept. 30, after sliding at a revised 3.7 percent rate in the previous quarter.

The International Monetary Fund's World Economic Outlook forecast last month that global growth will slow to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007.

``Given the fundamentals, the buying pressure is becoming dominant,'' said Akihiko Inoue, an analyst at Mizuho Investors Securities Co. in Tokyo. Medium-term debt may outperform bonds with a longer maturity, he said.

Deflation Risk

The extra yield 10-year conventional Japanese bonds offer over similar-maturity inflation-linked debt, known as the breakeven rate, was at minus 149 basis points today, according to data compiled by Bloomberg. A negative breakeven inflation rate reflects investor expectations for declining consumer prices over the life of the security.

``An easing of global market pressure, speculation of deflationary risks and BOJ rate cut speculation should foster yield drops,'' Tomoko Fujii, head of Japan economics and strategy in Tokyo at Bank of America Corp. wrote in a report yesterday.

The U.S. five-year breakeven rate was minus 54 basis points and the three-year U.K. breakeven spread was minus 39 basis points yesterday.

Sale Cancellation

Japan's Ministry of Finance may stop issuing floating-rate and inflation-linked bonds for the rest of the fiscal year because of low demand, Nikkei English News said, without saying where it got the information.

The finance ministry will decide whether to cancel sales of inflation-indexed debt after holding a regular meeting with investors in Tokyo today.

The ministry on Nov. 14 said it may increase the sales of one-year treasury bills and two- and five-year notes to local banks and sell more of the so-called super-long bonds that mature in 20, 30 and 40 years to life insurance companies and pension funds in the next fiscal year.

Thirty-year yields today rose by 7 basis points, the most this month, to 2.265 percent. Twenty-year yields gained 1 basis point to 2.16 percent.

The government will offer 900 billion yen ($9.3 billion) in 20-year bonds on Nov. 20.

``Yields on longer-dated bonds are expected to rise given the 20-year bond auction this week,'' said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., another primary dealer.

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

Last Updated: November 17, 2008 20:58 EST