March 23 (Bloomberg) -- Japan's 10-year government bonds fell the most in three months on concern yields are too low as prices of property and equities rebound.

Benchmark bonds halted a four-day rally that pushed yields to the lowest in more than a year yesterday after a government report showed the first gain in nationwide property prices in 16 years. The Nikkei 225 Stock Average today completed the biggest weekly advance in more than a year.

``It's time for bonds to end the rally, now that stocks are posting gains and yields are too low,'' said Norihisa Takao, who helps oversee the equivalent of $43 billion of debt at Daiwa Asset Management Co. in Tokyo. ``My bet is that bond yields are headed for a gradual increase given the outlook of the economy.''

The yield on the 1.7 percent bond due March 2017 gained 6.5 basis points to 1.61 percent as of 5:17 p.m. at Japan Bond Trading Co., the nation's largest interdealer debt broker. Yields had the biggest increase since Dec. 27. The bond's price fell 0.567 yen to 100.773 yen. A basis point is 0.01 percentage point.

Bank of Japan Governor Toshihiko Fukui on March 20 said policy makers will consider land prices and currencies in addition to economic and price data when considering whether to raise its 0.5 percent overnight lending rate. Yesterday, Fukui said the bank will gradually lift rates as the economy expands and prices rise.

On the week, 10-year bond yields rose 3 basis points, halting four consecutive weeks of higher bond prices.

Stocks, Land Prices

Japanese bonds with more than 10 years to maturity handed investors a 1.07 percent return since Feb. 27, the day a rout in global equity markets set off a three-week slump in the Nikkei 225 Stock Average. The slide in share prices around the world hasn't weakened the global economy, Fukui said yesterday.

The Nikkei 225 Stock Average rose as high as 0.7 percent today in Tokyo. Ten-year bond futures for June delivery declined 0.49 to 134.41 on the Tokyo Stock Exchange.

Property prices in Japan rose for the first time in 16 years in 2006 as overseas and domestic investors competed to acquire properties in the country's three biggest cities, a government report showed yesterday.

Whether a gain in land prices will help increase prices of other items is important when we judge the impact of the news on Japanese bonds, said Makoto Yamashita at Lehman Brothers Japan Inc.

``It's unnecessary to aggressively increase holdings of government bonds at these levels,'' said Yamashita, Tokyo-based chief bond strategist at Lehman Brothers, one of the 25 primary dealers that are required to bid at auctions.

Spread to Narrow

The breakeven inflation rate, which represents what the market expects core consumer prices to average in the next decade, was 0.5 percentage points today, highest since Feb. 5, according to data compiled by Bloomberg. The breakeven rate is the spread between yields on inflation-linked bonds and conventional debt.

``The theme of the market in coming months is how far consumer prices will drop and weaken inflationary pressure,'' said Tomohiko Katsu, a senior bond strategist at Nikko Citigroup Ltd., the fourth-largest buyer at government bonds auctions.

The spread between yields of five- and 10-year debt securities was 42.8 basis points yesterday, the narrowest this year, according to data complied by Bloomberg. The spread will narrow as concerns of a central bank rate increase dent demand for shorter-dated securities, said Daiwa Asset's Takao.

Core consumer prices, which exclude fresh food, probably fell 0.1 percent in February from a year earlier, a Bloomberg survey of 25 economists showed. The drop would be the first since April 2006. The statistics bureau is scheduled to release the report on March 30 at 8:30 a.m. in Tokyo.

National Debt

Ten-year bond yields may rise to 1.7 percent in three months, said Takao, who is keeping the average duration of his debt holdings in line with the benchmark index he uses to gauge performance. Duration measures a bond price's sensitivity to changes in yields, and the lower an investment's duration, the less it loses when yields rise.

A government report today showed foreign investors bought net 868.4 billion yen ($7.35 billion) in Japanese bonds during the week ended March 17. The amount was the biggest since the period ended Jan. 27, when they purchased net 978.3 billion yen.

Japan's national debt expanded 0.5 percent during the fourth quarter from the previous quarter to 832.26 trillion yen, and increased 2.3 percent from the same quarter a year ago, the Ministry of Finance in Tokyo said today.

To contact the reporter on this story: Issei Morita in Tokyo at imorita@bloomberg.net.

Last Updated: March 23, 2007 04:21 EDT