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Japan Bonds Gain Most in 7 Weeks on Stock Slide, Europe Concern

Japanese bonds rose the most in seven weeks as Asian stocks extended a slide in equities worldwide amid concern Europe’s debt crisis will spread and slow global economic growth.

Ten-year yields dropped to the lowest level in almost six months as Japanese shares slid for a fifth day after the International Monetary Fund urged Spain to do more to overhaul its struggling banks. Bond futures climbed to the highest in more than two years after a report showed North Korean leader Kim Jong Il last week ordered his military to prepare for possible combat.

“Risk aversion is becoming stronger due to uncertainties about the depth of the sovereign crisis in Europe,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Inc., which manages the equivalent of $17 billion. “This will encourage a flight-to-safety flow into such assets as bonds.”

The yield of the benchmark 10-year bond fell 3.5 basis points to 1.21 percent as of 4:37 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due March 2020 rose 0.309 yen to 100.789 yen. The yield is at the lowest since Dec. 1.

Ten-year bond futures for June delivery rose 0.35 to 140.60 in Tokyo after touching 140.63, the highest for a lead contract since March 2008. The Nikkei 225 Stock Average slumped 3.1 percent to the lowest this year.

Stocks Slide

Stocks fell worldwide after the International Monetary Fund said yesterday the Spanish banking industry “remains under pressure,” as consolidation has been “too slow.”

Four Spanish savings banks plan to combine to form the nation’s fifth-largest banking group. The move came after the Bank of Spain took over CajaSur, stepping up efforts to combine the weakest of Spain’s mutually owned banks that account for about half the country’s loans.

“There are no more options left for policy makers but to sit and wait even if they strive to stem the risk aversion arising from the debt crisis in Europe,” said Makoto Yamashita, chief Japan rate strategist at Deutsche Securities Inc. in Tokyo. “Risk aversion will help bonds stay firm.”

Benchmark bonds also gained for the fourth time in five days after the North Korea Intellectuals Solidarity group said on its website that the country’s military was put on alert.

The U.S. announced plans yesterday to conduct anti- submarine exercises with South Korea following the March 26 torpedoing of a warship.

‘Double Whammy’

“Asian equity markets were hit with a double whammy stemming from concerns in Europe and growing tensions on the Korean Peninsula,” said Ayako Sera, a strategist at Tokyo-based Sumitomo Trust & Banking Co., which manages the equivalent of $300 billion. “The bond market rose on the back of tumbling stock markets across the region and globe.”

Demand for shorter-maturity notes was tempered before the Ministry of Finance sells 2.6 trillion yen ($28.8 billion) of two-year debt on May 27.

The previous sale on April 27 drew bids for 4.73 times the amount on offer, compared with a so-called bid-to-cover ratio of 3 at the March 25 sale.

While gains were curtailed at the shorter end of the yield curve, “the auction will confirm solid demand for the two-year notes which are risk-free but offer better-than-nothing returns,” said Akitsugu Bandou, senior economist in Tokyo at Okasan Securities Co.

The two-year yield declined half a basis point to 0.155 percent.

Japan’s bonds have returned 4.2 percent in dollar terms this month, compared with a 2 percent profit on Treasuries and a 4.7 percent loss on German bunds, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.

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