Dec. 7 (Bloomberg) -- Japanese 10-year government bonds fell for a third day after the U.S. government approved a plan to limit subprime mortgage defaults, damping demand for the relative safety of debt.

Ten-year bonds completed a second week of losses as the announcement by President George W. Bush boosted global equities. The Organization for Economic Cooperation and Development said yesterday that the Federal Reserve and European Central Bank should avoid cutting interest rates, predicting the world economy will weather the fallout from the U.S. housing slump.

``The market is going down due to the strength in the equity market,'' said Susumu Kato, chief economist in Tokyo at Calyon Securities, one of the 26 primary dealers required to bid at government debt sales.

The yield on the 1.5 percent bond due December 2017 rose 1.5 basis points to 1.565 percent as of 3:14 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.13 yen to 99.437 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery declined 0.02 to 136.43 as of the 3 p.m. close at the Tokyo Stock Exchange. The Nikkei 225 Stock Average gained 0.5 percent.

Japan's bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.95 with the Nikkei 225 in the past two months, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep.

Slowing Growth

Declines in bonds may be limited after a government report showed the economy expanded slower than was initially reported in the third quarter, boosting speculation the Bank of Japan will delay raising interest rates.

``Gross domestic product was weaker, which is bond positive,'' said Naruki Nakamura, who helps manage the equivalent of $3.2 billion of bonds in Tokyo at Fischer Francis Trees & Watts.

Japan's economy grew an annualized 1.5 percent in the three months ended Sept. 30, the Cabinet Office said in Tokyo today. The median estimate of 25 economists surveyed by Bloomberg News was for the rate to be unchanged from the preliminary estimate of 2.6 percent.

The Bank of Japan will keep its key overnight rate at 0.5 percent for a 10th month on Dec. 20, according to calculations by JPMorgan Securities Japan Co. using overnight index swaps. The contracts show a 13 percent probability the central bank will raise borrowing costs in March by 25 basis points.

Investors should buy 10-year bonds and sell two-year notes, said Keiko Onogi, a debt strategist at Daiwa Securities SMBC Co. in Tokyo. Yields on two-year notes, currently at 0.74 percent, are unlikely to fall below 0.70 percent unless rate-cut expectations increase, she said.

The difference in yields between two- and 10-year debt has narrowed to about 83 basis points from this year's high of about 99 basis point on Jan. 31, Bloomberg data show.

Ten-year yields may rise to 1.68 percent by the end of March, according to the weighted average forecast in a Bloomberg survey of economists and analysts. The estimate puts a heavier weighting on more recent forecasts.

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

Last Updated: December 7, 2007 01:15 EST