Sept. 25 (Bloomberg) -- Japanese five-year notes rose, completing their biggest weekly gain this month, as a slide in stocks worldwide spurred demand for the relative safety of debt.

Benchmark five-year yields fell to the lowest level in more than a week on speculation banks were using their increasing cash reserves to purchase debt rather than make new loans. Bonds also gained before a government report next week that economists said will show consumer prices dropped at a record pace, enhancing the value of the fixed payments from debt.

“Bonds are benefiting from the losses in stocks,” said Akihiko Inoue, chief market analyst in Tokyo at Mizuho Investors Securities Co., a unit of Japan’s second-largest bank. “Banks probably don’t have a choice but to keep buying bonds as the economic outlook remains iffy.”

The yield on five-year notes fell 4.5 basis points this week to 0.58 percent as of 4:25 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 0.7 percent security due September 2014 rose 0.217 yen to 100.579 yen this week, in which trading was limited to today and yesterday due to public holidays.

Five-year yields dropped 1.5 basis points today, reaching the lowest level since Sept. 16.

Ten-year yields fell three basis points to 1.305 percent this week. The yield dropped one basis point today. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery gained 0.49 to 139.04 this week at the Tokyo Stock Exchange. On the day, the contract advanced 0.22.

Industrial Production

Bonds found buyers after the Nikkei 225 Stock Average fell 2.6 percent today, the biggest decline in almost six weeks. The Standard & Poor’s 500 Index dropped 1 percent yesterday.

Stocks slid after a U.S. report showed sales of existing homes unexpectedly declined, signaling the recovery in the world’s largest economy is losing momentum. Sales of existing U.S. homes fell 2.7 percent in August to a 5.1 million annual rate from a 5.24 million rate in July, the National Association of Realtors said in Washington.

Gains in bonds were tempered before a report that economists said will show Japan’s industrial production increased for a sixth month.

Factory output rose 1.8 percent in August after gaining 2.1 percent in July, according to a Bloomberg News survey of economists. The Trade Ministry will release the report Sept. 30.

“It will take until at least next month before the yen bond market starts to worry about a slowdown,” Chotaro Morita, head of fixed-income strategy research at Barclays Capital, wrote today in a note to clients.

Deflation Outlook

Bonds advanced on speculation declining prices will help boost the value of the fixed payments from debt.

Consumer prices excluding fresh food fell 2.4 percent last month from a year earlier after sliding 2.2 percent in July, a separate Bloomberg survey showed before the Sept. 29 report. That would be the sharpest drop since the survey began in 1971.

The difference between yields on five-year notes and similar-maturity inflation-linked debt, which reflects the outlook among traders for consumer prices over the term of the securities, was negative 1.11 percentage points.

Inflation-adjusted securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.

Japan’s Ministry of Finance will sell 2.4 trillion yen ($26.5 billion) of two-year notes on Sept. 29.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

Last Updated: September 25, 2009 03:40 EDT