Nov. 2 (Bloomberg) -- Japan’s government bonds advanced by the most in a month on speculation investors sought the relative safety of debt after CIT Group Inc. filed for bankruptcy.

Benchmark 10-year yields fell from near an 11-week high as the Nikkei 225 Stock Average slid the most in four weeks. CIT, the 101-year-old commercial lender, listed $71 billion in assets and $64.9 billion in debt in a Chapter 11 filing in the U.S. Bankruptcy Court for the Southern District of New York.

“Yields have entered a declining trend,” said Kenro Kawano, a fixed-income strategist at Credit Suisse in Tokyo. “The slump in stocks and the increase in volatility signals that the focus has shifted yet again to the weak economy.”

The yield on the 1.3 percent bond due September 2019 fell three basis points, the most since Oct. 2, to 1.375 percent at 4:23 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.259 yen to 99.348. Yields touched 1.425 percent on Oct. 30, the highest since Aug. 12. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery advanced 0.28 to 138.27 as of the afternoon close at the Tokyo Stock Exchange.

The Nikkei 225 dropped 2.3 percent today, the biggest slump since Oct. 2. Benchmark 10-year yields had a correlation of 0.6 with the Nikkei 225 so far this quarter, according to Bloomberg data. A value of 1 means the two moved in lock step.

‘Accumulate Positions’

“Bond buying will be favored given that stocks will drop and investors will want to accumulate positions at the beginning of the month,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank.

U.S. stocks dropped at the end of last week on declines in consumer confidence and spending. The Standard & Poor’s 500 Index slid 2.8 percent on Oct. 30.

The VIX Index, a measure of stock-market volatility known as Wall Street’s fear gauge, rose to 30.69 on Oct. 30, the highest level since July.

“We expect a short-term rebound in JGBs in spite of mounting supply concerns,” said Christian Carrillo, a senior interest-rate strategist at SG in Tokyo.

Demand for debt was tempered after Japan’s Ministry of Finance said that it will increase annual sales of government bonds in the fiscal year ending in March 2010 by 2.1 trillion yen ($23.5 billion) to a record 132.3 trillion yen.

Issuance Increase

Increased sales of one-year bills and five-year notes will begin this month and greater sales of two- and 10-year debt will start in December, the ministry said on Oct. 30.

“There is a still a huge concern surrounding the increases in sales,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., one of the 23 primary dealers that are required to bid at bond auctions. “With the 10-year auction just around the corner, it’ll take time for investors to turn bullish about bonds.”

Japan will sell 2.1 trillion yen in 10-year bonds on Nov. 5. The prior sale on Oct. 6 attracted bids worth 3.5 times the amount on offer, the highest ratio since May 2007. The so-called bid-to-cover ratio was 2.88 times at the September offering.

Primary dealers, which are required to bid at Ministry of Finance auctions, tend to reduce their debt holdings before a sale in case they fail to pass on the new securities.

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

Last Updated: November 2, 2009 02:30 EST