Sept. 15 (Bloomberg) -- Japan's 10-year bonds completed the biggest weekly gain in a month as speculation global economic growth will slow boosted demand for the relative safety of government debt.

Traders cemented expectations the Bank of Japan will keep interest rates unchanged on Sept. 19 after reports showed the economy shrank in the second quarter and employers in the U.S. cut jobs for the first time in four years. Prime Minister Shinzo Abe resigned this week, fueling concern political gridlock will delay government efforts to boost growth.

``The reality is that investors have to buy bonds because they're unlikely to increase exposure to equities or credit products, but still need to generate income,'' said Tatsuo Ichikawa, a fixed-income strategist at ABN Amro Securities Japan Ltd. in Tokyo. ``Investors and market participants are saying there may be less chance of a BOJ rate hike this year.''

The yield on the benchmark 10-year note fell 3.5 basis points this week to 1.555 percent, according to Japan Bond Trading Co., the nation's largest interdealer broker. The price of the 1.7 percent note due in September 2017 rose 0.305 yen to 101.254 yen. A basis point is 0.01 percentage point.

The 10-year bond future for December delivery gained 0.52 this week to 135.97 on the Tokyo Stock Exchange.

Stocks, Bonds

Merrill Lynch & Co. indexes show Japan's government bonds have given investors a return of 2.4 percent including reinvested interest since June 22, when Bear Stearns Cos. said it would bail out a hedge fund that lost money on securities related to subprime mortgages.

The Nikkei 225 Stock Average has lost more than 11 percent since then as banks became reluctant to lend due to concern more losses would be announced.

Bond yields typically fall when stocks decline. Ten-year yields had a correlation of 0.97 with the Nikkei 225 in the past three months, according to data compiled by Bloomberg. A value of 1 would mean the two moved in lock step

Gains in government debt were tempered by speculation some investors will refrain from buying the securities with 10-year yields close to an 18-month low. Yields on the bonds climbed yesterday as interbank lending rates fell and the Nikkei gained for a second day.

The 10-year yield reached 1.5 percent on Sept. 10, the lowest for a benchmark bond since February 2006.

`Who Wants to Buy'

``Who wants to buy bonds at these levels?'' said John Richards, head of debt markets strategy for the Asia-Pacific region at RBS Securities Japan Ltd. in Tokyo. ``To keep yields this low there needs to be a continuous injection of bad news.''

Countrywide Financial Corp., the biggest U.S. mortgage lender, said Sept. 13 it had lined up $12 billion of financing, adding to optimism the global credit market turmoil is easing.

Three-month dollar Libor, a key indicator of the willingness of banks to lend, fell to 5.69 percent on Sept. 13, a 10-day low, according to the British Bankers' Association.

Japan's Abe resigned on Sept. 12 after failing to regain public support following his ruling party's defeat in the Upper House election in July. The LDP plans to choose a successor on Sept. 23 and the new party leader will become prime minister.

The chance the central bank will increase its 0.5 percent benchmark rate at a two-day meeting ending Sept. 19 was zero yesterday compared with 36 percent three weeks ago, according to calculations by Credit Suisse Group using overnight index swaps. The Federal Reserve meets to review its 5.25 percent rate Sept. 18.

Leadership Election

``The BOJ is likely to keep interest rates unchanged'' next week, said Naomi Hasegawa, a senior bond strategist at Mitsubishi UFJ Securities Co. in Tokyo. ``If the Fed cuts rates by 50 basis points, Japanese investors will take it as a signal that the situation is that bad, which will be supportive of the JGB market.''

Bonds also gained after Northern Rock Plc, the U.K.'s worst performing bank stock this year, yesterday said the Bank of England agreed to provide emergency funds to ease a ``severe liquidity squeeze'' sparked by U.S. subprime-mortgage defaults.

The central bank will provide the nation's fourth-largest home lender with a credit line to keep it operating, the company said. Northern Rock is vulnerable to funding constraints triggered by the subprime crisis as it has a smaller deposit base than larger lenders.

The extra yield investors demand to hold Treasuries over Japanese bonds increased this month, making U.S. debt more attractive for some investors. The spread between U.S. and Japanese 10-year yields widened to 293.6 basis points on Sept. 13, the most since Sept. 4, according to data compiled by Bloomberg. The spread was about 290 basis points yesterday.

Bonds also fell as a technical chart some traders use to gauge price changes suggested yields may rise. The seven-day relative strength index on 10-year yields fell to 30 on Sept. 12, a level that suggests buying may have peaked.

Ten-year yields may rise to 1.9 percent by the end of December, according to the weighted average forecast of a Bloomberg News survey of economists and analysts.

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

Last Updated: September 14, 2007 20:14 EDT