Oct. 19 (Bloomberg) -- Japan's 10-year bonds completed the biggest weekly gain in two months as concern turmoil in global credit markets will worsen boosted demand for the relative safety of government debt.

The securities rose for a fourth day after sovereigns in the U.S. and Europe advanced yesterday on speculation the U.S. housing slump will weigh on global economic growth. Bank of Japan Governor Toshihiko Fukui yesterday said problems stemming from the U.S. subprime mortgage crisis persist and have raised financial market ``uncertainty.''

``The market can't foresee the end of the subprime issue, which is driving investors to buy bonds,'' said Takafumi Yamawaki, a fixed-income strategist in Tokyo at Morgan Stanley Japan Securities Co., one of the 26 primary dealers required to bid at auctions. ``The possibility of a U.S. hard landing is heightening and that would make Japan's economy slow.''

The yield on the 1.7 percent bond due September 2017 fell 11 basis points this week to 1.6 percent as of 3:28 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.94 yen to 100.855 yen. Today the yield fell 3.5 basis points. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery gained 0.33 today to 135.70 as of the 3 p.m. afternoon close on the Tokyo Stock Exchange.

``The time the housing market is taking to correct itself is cause for concern, and because this involves the financial markets, uncertainty is increasing,'' Fukui said after meeting U.S. Federal Reserve Chairman Ben S. Bernanke on the eve of a Group of Seven meeting in Washington.

Treasuries Gain

Local bonds advanced today after U.S. Treasuries gained for a fourth day yesterday when Bank of America Corp. said its third-quarter earnings declined as trading losses, defaults and writedowns on loans increased, renewing concern the credit- market rout will deepen.

Bonds are rising because ``the U.S. economy is uncertain and is going to be uncertain in the future,'' said Xinyi Lu, chief strategist at the international treasury division at Mizuho Corporate Bank Ltd. in Tokyo.

A decline in stocks also prompted investors to buy debt. The Nikkei 225 Stock Average slid 1.7 percent today, completing its first weekly loss in six.

Japan's bonds typically move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.92 with the Nikkei in the past three months, according to data compiled by Bloomberg. A value of 1 would mean the two moved in lockstep.

`Too Low'

The advance in bonds was tempered by speculation 10-year yields at the lowest in almost a month will deter investors from buying the securities.

``Yields are far too low,'' said Genji Tsukatani, a bond fund manager who helps oversee the equivalent of about $961 million at Schroder Investment Management Japan Ltd. in Tokyo. ``Yields should rise to 1.8 percent'' before 10-year bonds will be attractive, he said.

Ten-year yields have fallen from a high of 1.985 percent on June 13 before concerns about losses on securities tied to U.S. subprime loans spurred investors to shun riskier assets and seek the relative safety of government debt.

Bonds also gained as investors cut bets the central bank will raise interest rates this year.

The Bank of Japan on Oct. 11 kept its benchmark overnight lending rate at 0.5 percent, the lowest among industrialized economies, as policy makers sought more time to assess the effect of the U.S. housing slump.

Investors see a 31 percent chance policy makers will increase rates by December, down from 40 percent yesterday, according to Credit Suisse Group calculations using overnight index swap rates.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net.

Last Updated: October 19, 2007 02:29 EDT