Feb. 22 (Bloomberg) -- Japanese 10-year bonds rose for the first day in three after the Nikkei 225 Stock Average declined, boosting demand for debt's fixed payments.

Ten-year bond yields have fallen 0.51 percentage point from an almost four-year high marked in June, as a 4.7 percent rally in the yen against the dollar caused shares of exporters to slump. Today's decline in stocks helped bonds erase losses after an auction of 20-year debt drew less demand than the previous sale.

``Yen gains are weighing on stocks and lifting bonds,'' said Kei Matsumoto, a trader in Tokyo at UFJ Bank Ltd., the commercial banking unit of Japan's fourth-largest lender UFJ Holdings Inc.

The benchmark 1.3 percent bond due in December 2014 rose 0.127 to 98.880 as of the 6:05 p.m. close in Tokyo at Japan Bond Trading Co. Its yield fell 1.5 basis points to 1.43 percent after rising to 1.46 percent. Ten-year bond yields may fall to 1.35 percent in the next few months, Matsumoto said.

Bond futures for March delivery rose 0.08 to 138.53.

Exporters such as Toyota Motor Corp. and Advantest Corp. led the 0.5 percent drop in the Nikkei 225 Stock Average. Japan sends about a fifth of its exports to the U.S. and overseas sales account for a 10th of the world's second-largest economy.

The yen gained to 104.04 against the dollar from 105.54 in New York yesterday, according to EBS, an electronic foreign- exchange dealing system.

Auction

Bond futures fell briefly after the Ministry of Finance's new 20-year securities were sold at a price that was less than traders forecast at an auction.

The government's 600 billion yen ($5.77 billion) sale drew bids worth 4.08 times the amount of debt sold, less than 4.48 times at the previous auction in January.

``The auction wasn't as good as people had expected,'' which spurred some selling, said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi Securities Co. in Tokyo, part of Mitsubishi Tokyo Financial Group Inc., Japan's No. 2 lender.

The 20-year securities sold at a lowest price of 100.45, less than the median forecast of 100.50 in a Bloomberg News survey of 15 traders. The Ministry of Finance set a 2.1 percent coupon on the bonds after yields rose to a three-month high last week.

Bonds still rose on speculation pension funds and other investors will buy the securities to match a record change in the Nomura Bond Performance Index next month.

Index Extension

Nomura Securities Co. will add fixed-income securities sold in February, including 10-, 20- and 30-year bonds, to the index and remove debt due in a year or less.

The changes will increase the index's duration by about 0.19 year on March 1, according to Nomura Securities Financial and Economic Research. Duration measures a bond price's sensitivity to changes in yield.

``With the big increase in the index at the start of March, there is underlying demand for 20-year bonds,'' said Makoto Yamashita, an economic strategist in Tokyo at UFJ Tsubasa Securities Co., another primary dealer.

Two-year notes may fall after a newspaper report raised concern the central bank policy will tighten monetary policy.

Atsushi Mizuno, a central bank policy maker, said the Bank of Japan may cut its reserve target should the economy show it is on a path of self-sustained recovery, and if the disadvantages of the current policy outweigh benefits, the Mainichi newspaper reported, citing an interview with Mizuno.

BOJ

The bank pushed interest rates to near zero percent in 2001 and started setting a target for the amount of money in the banking system. The bank has raised that target nine times since then, most recently to 30 trillion yen to 35 trillion yen in January 2004. It has never lowered the target since 2001.

The yield on the 0.1 percent note maturing in February 2007, among the securities most sensitive to changes in interest-rate policy, rose half a basis point to 0.11 percent, according to Japan Bond Trading.

The extra yield U.S. 10-year notes offer over similar maturity Japanese bonds was 2.82 percentage points yesterday. The average for the past year is 2.76 percentage points.

The No. 267 bond with a 1.3 percent coupon due in December 2014 closed at 98.89 to yield 1.428 percent, according to the Bloomberg Yen Bond Fixing Price. The level is an average rate set at 6:30 p.m. in Tokyo by Daiwa Securities SMBC Co., Nikko Citigroup Ltd., Mizuho Securities Co. and Mitsubishi Securities Co.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net.

Last Updated: February 22, 2005 04:42 EST