Oct. 6 (Bloomberg) -- Japan's government bonds posted a weekly decline, pushing 10-year yields up by the most since Sept. 21 as a rally in global stocks reduced demand for the relative safety of government debt.

The Nikkei 225 Stock Average completed a fourth week of gains, the longest winning streak this year, after the Bank of Japan's Tankan survey showed business confidence unexpectedly held near the most in two years. The Dow Jones Industrial Average reached a record this week on speculation U.S. companies have weathered the worst of losses linked to subprime mortgages.

``Rising stocks prompted an unwinding of flight-to quality,'' said Takafumi Yamawaki, a fixed-income strategist at Morgan Stanley Japan Securities Co., one of the 26 primary dealers that are required to bid at auctions. ``Optimism is growing that the worst for the subprime problem is over.''

The yield on the benchmark 10-year bond rose 2.5 basis points to 1.70 percent this week at Japan Bond Trading Co., the nation's largest interdealer debt broker. Five-year yields climbed 4 basis points to 1.235 percent on the week. A basis point is 0.01 percentage point. Yields move inversely to prices.

An index of Japanese government debt handed investors a loss of 0.2 percent in the past month, including reinvested interest, according to Merrill Lynch & Co. By comparison, the Nikkei 225 gained 5.6 percent.

`Clouds on the Horizon'

Declines in bonds were limited by speculation 10-year yields near the highest in more than six weeks will lure investors. Yields climbed to 1.715 percent on Oct. 4, near the 1.725 percent reached Sept. 27, the highest since Aug. 13.

U.S. reports this week showed pending home sales fell to a record low in August and factory orders declined. Bank of Japan Deputy Governor Kazumasa Iwata said on Oct. 4 that financial- market turmoil and a slowdown in the U.S. or Europe could hurt the world's second-largest economy.

``The U.S. data coming through are relatively weak and we are still seeing clouds on the horizon,'' said Shinji Hiramatsu, a fund manager in Tokyo who helps oversee the equivalent of about $6 billion at Sompo Japan Asset Management Co., a unit of the nation's third-largest casualty insurer. ``It's difficult for the BOJ to raise rates until it is sure that the aftermath of the subprime problem is over.''

Bonds also fell as the central bank's quarterly Tankan index of manufacturer sentiment beat economists' estimates and companies increased spending plans, shrugging off a slowdown in the U.S., the nation's largest export market.

`Turning Better'

``Domestic data have been turning better, so that is a valid support for the Nikkei'' and negative for Japanese debt, said Hitomi Kimura, a bond strategist in Tokyo at JPMorgan Securities Japan Co., another primary dealer.

The Tankan index of sentiment at large manufacturers stayed at 23 points in September from June, the central bank said on Oct. 1. The median estimate of 32 economists was for a decline to 21 points. A positive number means optimists outnumber pessimists. Japan's biggest companies said they plan to increase spending 8.7 percent in the year ending March, faster than June's projection of 7.7 percent, the Tankan showed.

Ten-year yields may rise to 1.88 percent by the end of March, according to the weighted average forecast of a Bloomberg News survey of economists and analysts. The estimate puts a heavier weighting on more recent forecasts.

Rising stocks also limited demand at the government's 1.9 trillion yen sale of 10-year bonds on Oct. 2.

The auction drew bids worth 2.71 times the amount sold, lower than last month's ratio of 2.77. The securities had a lowest accepted price of 100.12, below the median estimate of 100.14 in a Bloomberg survey of 14 traders.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Oliver Biggadike in Tokyo at obiggadike@bloomberg.net.

Last Updated: October 5, 2007 20:57 EDT