April 6 (Bloomberg) -- Japan's 10-year bonds may fall for a second day on speculation gains in stocks will lure investors away from debt's fixed payments.

Ten-year yields on April 1 reached the lowest in almost two months after government reports last week showed industrial production and household spending dropped in February. Figures on April 8 will probably show machinery orders gained, easing concern that the world's second largest-economy will slow.

``There's no need to be in a hurry to buy bonds at these levels,'' said Naoki Suzuki, a Tokyo-based strategist at Dresdner Kleinwort Wasserstein (Japan) Ltd., one of the 28 primary dealers invited to discuss bond sales with the Ministry of Finance. ``Gains in stocks may discourage buyers in bonds.''

Ten-year bond futures for June delivery fell to 139.11 on the London International Financial Futures Exchange from 139.18 at the 3 p.m. close in Tokyo yesterday. The contract will open for trading at 9 a.m. Tokyo time.

The 1.5 percent bond due March 2015 fell yesterday, pushing its yield up 3 basis points to 1.355 percent, according to Japan Bond Trading Co., the nation's largest debt broker. The 1.3 percent bond due in March 2015, which was auctioned yesterday, closed at 1.38 percent. A basis point is 0.01 percentage point. Ten-year yields may rise to 1.4 percent today, Suzuki said.

Stocks

Japanese shares may gain after all three U.S. benchmark stock indexes yesterday had their first back-to-back advances in a month. The Standard & Poor's 500 Index rose 0.5 percent yesterday.

Bond returns are lagging behind those of stocks for a third year. An index of Japanese government bonds returned 0.7 percent this year, according to Merrill Lynch & Co., the world's biggest securities firm by capital. The Nikkei 225 Stock Average has gained 2.5 percent. The Nikkei yesterday rose 0.9 percent.

Private machinery orders, excluding shipping and utilities, probably rose 2.7 percent in February, compared with a 2.2 percent drop the previous month, according to the median forecast of 33 economists surveyed by Bloomberg News.

Bonds may gain on speculation the Bank of Japan will hold down interest rates this year to help the economy recover from a seven-year bout of deflation.

Japan's index of leading economic indicators probably fell to 20 in February, signaling growth is set to slow. A number below 50 points to a contraction in growth in three to six months. The report will be released at 2 p.m. in Tokyo.

The central bank, which is holding a two-day policy meeting ending today, will probably keep borrowing costs near zero after its Tankan survey last week showed confidence among large manufacturers fell to the lowest in a year, economists said.

BOJ Meeting

BOJ Governor Toshihiko Fukui and the bank's eight other policy makers will also continue to pump cash into the economy and maintain reserves available to lenders between 30 trillion yen and 35 trillion yen, said all 14 economists surveyed by Bloomberg News.

``It's difficult to expect a sustainable rise in yields,'' said Makoto Yamashita, an Tokyo-based economic strategist at UFJ Tsubasa Securities Co., a primary dealer. ``The figures, such as the Tankan, are signaling the future of the economy is looking hazy.'' Ten-year yields may fall to 1.35 percent today, he said.

Nationwide core consumer prices excluding fresh food fell 0.4 percent in February from a year-earlier level. Core prices have only risen once since April 1998.

The extra yield that U.S. 10-year notes offer over similar maturity Japanese bonds was 3.12 percentage points yesterday. The average for the past year is 2.82 percentage points.

The No. 268 bond with a 1.5 percent coupon due in March 2015 closed at 101.26 to yield 1.355 percent yesterday, 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: April 5, 2005 19:29 EDT