Oct. 4 (Bloomberg) -- Japan's 10-year bonds fell, pushing yields to the highest in almost a year, after a government sale of the securities drew the lowest demand in 19 months.

Bonds also fell as stocks rallied. Exporters such as Canon Inc. and Honda Motor Co. led shares higher on speculation demand will grow in the U.S., Japan's biggest export market.

``The auction showcased disappointing demand,'' said Shigeru Endo, who helps oversee the equivalent of about $2.63 billion of fixed-income assets at Fuji Investment Management Co. in Tokyo. ``Rallying stocks are building sentiment that Japan's economy will sustain a reasonably good pace of growth, signaling higher yields.''

The yield on the benchmark 1.4 percent bond due in September 2015 rose 6.5 basis points to 1.56 percent, the highest for 10-year bonds since November 2004, at 3:08 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest debt broker.

The price fell 0.555, or 555 yen per 100,000 yen face amount, to 98.621. Ten-year bond futures for December delivery dropped 0.75 to 136.74.

Endo at Fuji Investment, a unit of Mizuho Financial Group Inc., Japan's second-largest lender by assets, said he's keeping the average duration of his debt holdings shorter than his benchmark, the Nomura Bond Performance Index. Duration measures sensitivity to changes in interest rates, and the lower an investment's duration, the less it loses when yields rise.

Bidding Wanes

The Nikkei 225 Stock Average rose 1.6 percent to its highest close since May 2001.

The Ministry of Finance sold 1.9 trillion yen ($16.7 billion) 10-year bonds with a 1.5 percent coupon, the highest since March. The auction drew bids worth 2.26 times the debt sold, down from 2.88 at the prior auction on Sept. 1, and the lowest since March 2004.

Declines in bonds were limited by speculation 10-year yields approaching a one-year high will attract investors as falling consumer prices persist.

Finance Minister Sadakazu Tanigaki today said at a regular press conference in Tokyo that mild deflation continues to grip Japan, and the country needs to make efforts to overcome it.

``There should be demand for bonds with yields at around 1.5 percent,'' said Yasunori Kuroda, who helps manage fixed- income assets in Tokyo at Sompo Japan Insurance Inc., the nation's third-largest casualty insurer. The company holds the equivalent of about $44 billion in assets.

`Hard to Buy'

Bonds may also be poised for a rebound based on the relative strength index, a technical indicator that some investors use to gauge momentum. The RSI for the past 14 trading days on 10-year yields rose to 72 yesterday from 59 a week ago. A level 70 implies selling may have run its course.

Bonds fell after U.S. manufacturing unexpectedly quickened in September, fueling speculation demand for Asian goods will increase and help Japan's recovery. Overseas sales account for a 10th of the Japanese economy.

``It's hard to buy bonds as stocks are rising,'' said Keisaku Ujihara, a fund manager at Mitsubishi UFJ Asset Management Co. in Tokyo, part of Mitsubishi UFJ Financial Group Inc., the world's biggest lender by assets. ``Strong U.S. growth is a big help for Japan's economy.''

Ujihara said he is keeping the average duration of his debt holdings shorter than his benchmark, the Nomura Bond Performance Index.

To contact the reporter on this story: Issei Morita in Tokyo at imorita@bloomberg.net.

Last Updated: October 4, 2005 02:15 EDT