By Theresa Barraclough Oct. 14 (Bloomberg) -- Japan's bonds fell after the Nikkei 225 Stock Average rallied by the most in its history on a U.S. government plan to buy stakes in major banks. Ten-year yields climbed to the highest in 2 1/2 months after France, Germany, Spain, the Netherlands and Austria committed 1.3 trillion euros ($1.8 trillion) to guarantee deposits and take stakes in lenders. The U.S. government will announce the plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for preferred shares of nine major banks, people briefed on the matter said. ``The market sentiment is improving for the stock market and it's bond bearish,'' said Takashi Nishimura, an analyst at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets, in Tokyo. ``It's been a relief and a rebound from the gloomiest of weeks.'' The yield on the 1.5 percent bond due September 2018 rose 5.5 basis points to 1.575 percent as of 3:01 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 0.471 yen to 99.356 yen. The yield reached 1.63 percent, the highest since July 24. Five-year yields increased 5.5 basis points, or 0.055 percentage point, to 1.165 percent. Bond futures trading started about 40 minutes late because of an imbalance between buy and sell orders, according to the exchange. Ten-year bond futures for December delivery tumbled 1.25 to 136.10 as of the afternoon close. Japan's markets were closed yesterday for a national holiday. `Selling Pressures' ``As concerns of the credit crunch diminish, flight to quality will be unwound and the selling pressure in JGBs will become strong,'' said Eiji Dohke, chief strategist at UBS Securities Japan Ltd. in Tokyo. The Dow Jones Industrial Average had its biggest rally since 1933, surging 11 percent after the Group of Seven nations pledged at the weekend to take ``all necessary steps'' to stem a market panic. The Nikkei gained as much as 14.3 percent today. The Federal Reserve, the European Central Bank, the Bank of England and the Swiss central bank will auction unlimited dollar funds. Previous swap arrangements between the Fed and other central banks were capped. ``We reaffirmed that G-7 nations will implement necessary steps promptly with strong determination to ensure the stability of the global financial markets and restore confidence in the financial system,'' Bank of Japan Governor Masaaki Shirakawa said on Oct. 10 after meeting with his counterparts from the Group of Seven countries. Time to Buy? The decline in bonds may be limited amid signs the world's second-largest economy is slowing. ``The dip in bond prices is a buying opportunity,'' said Guthrie Williamson, portfolio manager in Sydney at Principal Global Investors, which manages $244.9 billion in assets globally. ``We are still in a de-leveraging cycle with slowing economic growth. Problems will not be solved overnight.'' Japan's economy shrank 3 percent in the three months ended June 30, the steepest contraction since 2001, the Cabinet Office said last month. There is a 16 percent chance the Bank of Japan will lower borrowing costs to 0.25 percent from 0.5 percent by Dec. 31 to boost the faltering economy, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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