Oct. 28 (Bloomberg) -- Japan's government bonds fell on speculation dealers sold debt to prepare for an 800 billion yen ($8.6 billion) auction of 20-year securities today.

The Ministry of Finance on Oct. 20 said it will increase 20-year bond sales to make up for a reduction in 15-year floating and inflation-linked bonds. The amount of 20-year bond sales per auction will rise to 900 billion yen from 800 billion yen, starting from November. Primary dealers, which are obliged to bid at auctions, tend to reduce holdings of bonds in case prices fall before they can pass on new securities to investors.

``There is a lot of concern about the supply and demand balance,'' said Akihiko Inoue, an analyst at Mizuho Investors Securities Co. in Tokyo. ``Investors such as life insurers bought in the first six month, so they may have no need to buy. This auction will test the demand from domestic investors.''

The yield on the 1.5 percent bond due September 2018 rose 3.5 basis points to 1.505 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 0.303 yen to 99.956 yen.

Twenty-year yields were unchanged at 2.175 percent. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery lost 0.27 to 137.88 at the Tokyo Stock Exchange.

Nippon Life Insurance Co., Japan's biggest life insurer, said last week it plans to reduce domestic bond holdings by 100 billion yen this fiscal year ending March 31. Meiji Yasuda Life Insurance Co., the third-largest life insurer, also said it will cut investments in Japanese bonds.

Coupon Amount

The finance ministry set a 2.2 percent coupon on the new 20-year securities, up from 2.1 percent at the sale in September. The auction results will be announced at 12:45 p.m. local time.

The Sept. 18 sale drew bids worth 2.36 times the amount on offer, compared with a so-called bid-to-cover ratio of 3.41 at the August sale. Last year's average was 3.56 times.

``If the auction is bad, the curve will bear steepen,'' said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., a Japanese unit of the world's biggest bank by assets. He was referring to when yields on longer-dated bonds rise at a faster rate than those on shorter notes.

The difference in yields between five- and 20-year debt expanded to 119 basis points yesterday, the widest since April, according to data compiled by Bloomberg. Last year's average spread was about 92 basis points.

Rate-Cut Odds

Bond losses may be limited as traders added to bets the Bank of Japan will cut interest rates this year to spur economic growth. Japan's stocks fell as much as 2.4 percent today to 6,994.90, the lowest since 1982. The yen traded at 93.25 per dollar after touching a 13-year high of 90.93 on Oct. 24.

``The stock market is going lower from here and the yen will get stronger, so the BOJ should act more aggressively,'' said Tomohiko Katsu, deputy general manager of the capital market division at Shinsei Bank Ltd. in Tokyo. ``The five-year looks attractive.''

There is a 42 percent chance the central bank will lower borrowing costs to 0.25 percent from 0.5 percent by Dec. 31, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps. The odds were 36 percent yesterday.

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

Last Updated: October 27, 2008 22:13 EDT