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Japan's 10-Year Bonds Advance Most in Two Weeks on European Debt Concern

Japan’s bonds rose the most in almost two weeks as speculation Europe’s debt crisis will spread caused investors to seek the refuge of government debt.

Benchmark yields fell from a three-month high after the Wall Street Journal said European policy makers are planning a more rigorous round of “stress tests” for banks. Bonds also gained after Bank of Japan board member Miyako Suda said the chance deflation will end in Japan in the fiscal year starting April 2011 isn’t high. The government sold 2.2 trillion yen ($26 billion) of 10-year bonds today.

“It will take a strong consensus among European nations to eliminate investor concerns about the region’s debt markets,” said Satoshi Yamada, who helps oversee $11 billion as a manager of fixed-income trading at Okasan Asset Management Co. in Tokyo. “People are turning to safer assets like JGBs and U.S. bonds.”

The yield on the 1 percent bond due September 2020 fell 4.5 basis points to 1.14 percent as of 3:51 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.391 yen to 98.767 yen.

The decline in yield was the most since Nov. 19. They earlier climbed to 1.195 percent, matching the highest level since Sept. 6.

Ten-year bond futures for December delivery gained 0.46 to 141.33 at the afternoon close at the Tokyo Stock Exchange.

Debt Crisis

Concern Europe’s debt crisis will worsen has shifted to Portugal and Spain since Nov. 28, when the region’s governments gave Ireland an 85 billion-euro ($110.8 billion) rescue package. Standard & Poor’s said yesterday it may cut Portugal’s credit ratings on concern the government has made little progress on boosting economic growth to offset the fiscal drag from scheduled 2011 budgetary cuts.

“External factors are not justifying an ongoing hike in yields, as Europe’s debt issue reemerges and an increase in U.S. yields takes a pause,” said Naomi Hasegawa, a senior debt strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest lender by assets. “Market participants are poised to look for reasons to buy back bonds.”

Ten-year yields may drop to 1.10 percent by year-end, Hasegawa said. Should her forecast prove accurate, investors who buy the securities today will make a 0.5 percent return, Bloomberg calculations show.

The gain in bonds was tempered as the 10-year auction drew less demand than some traders forecast.

The lowest price at the sale was 100.01 yen, below the 100.10 median forecast of 14 traders in a Bloomberg News survey. The offering drew bids for 2.41 times the amount on offer, down from a so-called bid-to-cover ratio of 3.91 times at the previous auction in November.

“The auction ended weaker than I had expected,” said Satoshi Yamada, chief quantitative analyst in Tokyo at Nikko Cordial Securities Inc. “But bonds are being supported as people buy them on dips with yields around 1.2 percent.”

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

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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