Oct. 13 (Bloomberg) -- Japan’s 10-year bonds fell for a second day, the first back-to-back decline in three weeks, after stocks advanced in the U.S., Europe and Asia, reducing demand for the relative safety of government debt.

Ten-year yields climbed to the highest level in more than two weeks as the Nikkei 225 Stock Average advanced for a fifth day after the Standard & Poor’s 500 Index reached a one-year high. Demand for bonds also waned on speculation the Bank of Japan will examine withdrawing emergency credit supply at a two- day policy meeting that starts today. Japan’s financial markets were closed yesterday for a public holiday.

“In this environment where stocks are being bought back, investors are taking profit on bonds,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA, one of the 23 primary dealers that are required to bid at bond auctions.

The yield on the 1.3 percent bond due September 2019 rose 1.5 basis points, or 0.015 percentage point, to 1.295 percent at 4:37 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.133 yen to 100.043 yen. Ten-year yields earlier reached 1.3 percent, the highest since Sept. 25.

Ten-year bond futures for December delivery dropped for a fourth day, the longest slide in more than three weeks. The contracts declined 0.04 to 139.09 as of the afternoon close at the Tokyo Stock Exchange.

The S&P 500 rose 0.4 percent yesterday after Ford Motor Co. said sales in Europe increased 12 percent in September and Black & Decker Corp. boosted its third-quarter earnings forecast. The Nikkei 225 advanced 0.6 percent today.

Steepening Trade

Benchmark 10-year yields had a correlation of 0.73 with the Nikkei 225 in the past month, compared with a relationship of 0.25 the prior four-week period, according to Bloomberg data. A value of 1 means the two moved in lockstep.

Investors should bet that 10-year yields will climb faster than five-year rates, said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., another primary dealer.

“As longer-dated yields are likely to rise, I recommend investors enter five- to 10-year steepening trades,” Dohke said. Ten-year yields may increase to 1.3 percent today, he said.

A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.

The yield differential between five- and 10-year debt shrank to 67 basis points on Oct. 9, the narrowest since Aug. 17, according to data compiled by Bloomberg. The spread widened one basis point to 69 basis points today.

Deflation Pressures

Bond losses were limited as investors added to bets that consumer prices will decline over the next five years, boosting the allure of debt’s fixed returns.

“From a fundamental perspective JGB yields look too high, given the plausible outcomes for growth and inflation,” Christian Carrillo, a senior interest rate strategist at Societe Generale SA in Tokyo, wrote in a report. “JGB breakevens, an imperfect yet forward-looking inflation measure, also imply deflation in the long-run.”

Five-year notes protected against inflation yielded 1.08 percentage points more than similar-dated regular notes today, compared with 1.06 percentage points a week ago, Bloomberg data showed. Inflation-adjusted securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.

A report tomorrow is forecast to show wholesale prices fell for a ninth month in September. Prices dropped 7.9 percent from a year earlier, according to the median estimate of economists in a Bloomberg survey of economists. The Bank of Japan will release the report tomorrow at 8:50 a.m. in Tokyo.

Insurance Companies

Dai-ichi Mutual Life Insurance Co., with about $320 billion in assets, said it plans to boost its yen-denominated bond holdings in the fiscal second half.

“We’re still not at a stage where we can increase our bets on asset classes that are riskier,” said Akinao Nishio, a manager in the insurer’s investment planning division.

Five-year notes earlier fell on speculation BOJ Governor Masaaki Shirakawa and his colleagues may say they will allow their corporate debt purchase programs to expire on Dec. 31 as scheduled. The central bank will also hold the benchmark interest rate at 0.1 percent, according to all of the 20 economists surveyed by Bloomberg News.

Since lowering rates to 0.1 percent in December, the bank started buying commercial paper and corporate bonds from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The policy board extended the plans to Dec. 31 when it met in July.

“The market has priced in the end of the operations by year-end,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second- largest bank. “The bond market has entered a bearish trend in the short run.”

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

Last Updated: October 13, 2009 04:00 EDT