Oct. 11 (Bloomberg) -- Japan's government bonds may fall for a third day as signs the U.S. economy is weathering the housing slump reduced speculation that the Federal Reserve will cut borrowing costs this month.

Evidence that the world's largest economy can avoid a recession may allow the Bank of Japan to raise interest rates this year, damping demand for short-term debt. Japan's machinery orders fell in August after rising at the fastest pace in almost four years in July, the Cabinet Office said in Tokyo today.

``Limited expectations for a Federal Reserve rate cut is keeping open the possibility of a BOJ rate hike this year,'' said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo, the top-ranked bond analyst in Japan according to Nikkei Bonds and Financial Weekly. ``We might see selling if investors become more cautious.''

Ten-year bond futures for December delivery were little changed at 134.34 as of 9:05 a.m. on the Tokyo Stock Exchange.

The benchmark 10-year security hasn't traded yet today at Japan Bond Trading Co., the nation's largest interdealer debt broker. The yield on the 1.7 percent bond due in September 2017 rose 1.5 basis points to 1.725 percent yesterday. A basis point is 0.01 percentage point. Bond prices move opposite to yields.

Governor Toshihiko Fukui and his colleagues will leave the benchmark overnight lending rate at 0.5 percent today, according to all 39 economists surveyed by Bloomberg News. Fukui will give a press conference at 3:30 p.m. in Tokyo.

The BOJ has kept borrowing costs unchanged since February when policy makers raised interest rates a quarter-percentage point to 0.5 percent, the lowest among major economies.

Japan's machinery orders declined a seasonally adjusted 7.7 percent to 1.04 trillion yen ($8.9 billion) from the previous month, the Cabinet Office said. The median estimate of 42 economists surveyed by Bloomberg News was for a 5.6 percent drop.

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 10, 2007 20:13 EDT