Aug. 17 (Bloomberg) -- Japan's government bonds rose, pushing down 10-year yields by the most in three months, on speculation demand for exports will wane as record fuel prices damp orders from the U.S.

Ten-year bond yields declined from the highest in almost five months after Wal-Mart Stores Inc. of the U.S., the world's biggest retailer, cut its annual profit forecast, saying gasoline prices are crimping consumer spending. Overseas shipments account for 10 percent of Japan's economy.

``I bought some bonds'' last week, said Naruki Nakamura, who helps manage the equivalent of about $3.7 billion of debt at Fischer Francis Trees & Watts in Tokyo, which is partly owned by BNP Paribas SA, France's second-biggest bank by assets. ``Growth may slow down next year due to the effect of oil prices.''

The yield on the 1.3 percent bond due in June 2015 fell 4 basis points to 1.43 percent as of 3:33 p.m. in Tokyo, according to Japan Bond Trading Co., the nation's largest debt broker. It was the biggest decline in 10-year yields since May 24. A basis point is 0.01 percentage point.

Its yield yesterday rose to 1.485 percent, the highest since March 15. The price rose 0.340 yen to 97.891 yen.

Ten-year bond futures for September delivery rose 0.48 to 138.68 as of the 3 p.m. close on the Tokyo Stock Exchange.

Exports from Japan, the world's second-biggest economy, rose 3.7 percent in June from a year earlier, according to a report on Aug. 11. The figure about a fifth of the 19.8 percent growth a year earlier, the fastest pace in eight years.

Crude oil futures rose 7 cents to $66.15 a barrel in after- hours electronic trading on the New York Mercantile Exchange. Futures surged to $67.10 on Aug. 12, the highest since trading began in 1983, and are up 42 percent from a year ago.

Tanigaki, Fukui

Japan's Finance Minister Sadakazu Tanigaki said on Aug. 12 that an increase in crude oil prices is a ``concern'' for the economy. Bank of Japan Governor Toshihiko Fukui said on June 26 that oil prices may be ``the biggest risk'' for world growth.

Bonds have slid the past two days as Morgan Stanley Japan Ltd. and BNP Paribas Securities Japan Ltd. raised their forecasts for economic growth.

Investors decreased holdings of Japanese bonds compared to their benchmarks from a month earlier, according to a survey released Aug. 11 by Merrill Lynch & Co., the world's biggest securities firm by capital.

``Some overseas hedge funds have switched from holding long positions to short positions on bond futures and are behind the drop in bonds,'' said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., which is owned by UBS AG, Europe's biggest bank by assets. A long position in bond futures means investors are betting on price gains and a short position means they are betting on price declines.

Ten-year bond yields may rise to 1.48 percent today, he said.

Overseas Selling

Economists boosted forecasts after a government report last week showed the world's second-biggest economy expanded for a third straight quarter, growing 1.1 percent.

Morgan Stanley increased its forecast for the fiscal year ending March 31 to 2.5 percent from 1.6 percent, economists Robert Feldman and Takehiro Sato in Tokyo wrote in a report yesterday. BNP raised its outlook for the period to 2.3 percent from 2.2 percent.

Investors' net exposure to Japan was 27 in August, down from 30 a month earlier, according to a Merrill Lynch survey of 100 global fixed-income managers. A reading of 50 means investors are neutral.

`Attractive' Yields

Some economists are predicting growth will slow next fiscal year, compared with their forecasts for this year.

Societe Generale SA, France's third-biggest bank, predicts growth will slow to 1.8 percent in the year beginning April 1 from 2.2 percent this business year.

``Yields are at an attractive level,'' said Norihisa Takao, who helps oversee the equivalent of about $46 billion of fixed- income securities in Tokyo at Daiwa Asset Management Co., the largest manager of Japanese money market funds. ``Oil prices may slow global growth, which would hurt demand for Japan's exports.''

Takao is keeping the average duration of his bond holdings longer than that of his benchmark. Duration measures sensitivity to changes in interest rates, and a higher figure indicates a more bullish position.

To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net

Last Updated: August 17, 2005 02:36 EDT