By Yasuhiko Seki Oct. 16 (Bloomberg) -- Japan’s 10-year government bonds declined, pushing yields to their highest level in three weeks, as signs that the global recession is easing damped demand for the safety of government debt. The securities headed for a second week of losses after a report showed manufacturing in the New York region expanded for a third-straight month, reinforcing views that factories are helping pull the world’s largest economy out of recession. Demand for government debt also weakened before reports estimated to show U.S. industrial production rose for a third- straight month and Japan’s exports fell at a slower pace. “Japan’s exports, which have been languishing since the collapse of Lehman, may start expanding in the October-December quarter as the global economy improves,” said Tatsushi Shikano, senior economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest banking group. “Given slow but steady improvement, bonds will weaken and stocks may rise.” The yield of the benchmark bond rose one basis point to 1.325 percent at 3:05 p.m. in Tokyo, at Japan Bond Trading Co., the nation’s largest interdealer debt broker. It earlier reached 1.330 percent, the highest since Sept. 24. The price of the 1.3 percent securities due September 2019 fell 0.088 to 99.780 yen. For the week, the yield increased 4.5 basis points. A basis point is 0.01 percentage point. Ten-year bond futures for December delivery declined 0.25 this week to 138.88 yen in Tokyo. The Federal Reserve Bank of New York’s general economic index soared to 34.6, the highest since mid-2004, from 18.9 in September, the bank said yesterday. Readings above zero for the Empire State index signal manufacturing is growing. ‘Optimistic’ Output at U.S. factories, mines and utilities climbed 0.2 percent in September following increases of 0.8 percent and 1 percent in August and July, according to the median forecast of economists surveyed by Bloomberg News. The Fed will report the figures today in Washington. Adding to signs that the global downturn is easing, Japan’s shipments abroad fell 30 percent last month from a year earlier, compared with a 36 percent drop in August, according to a Bloomberg News survey of economists before the government releases the report on Oct. 22. Exports have fallen every month on a year-on-year basis since Lehman Brothers Holdings Inc. went bankrupt in September 2008. “People are again turning optimistic about prospects for the economy and corporate profits,” said Mitsuru Saito, chief economist at Tokai Tokyo Securities Co., one of 23 primary dealers, which are required to bid at bond auctions. “Bonds will basically underperform assets such as stocks and commodities which can yield better returns than debt.” Higher Yields The Nikkei 225 Stock Average completed a 2.4 percent climb this week. Benchmark 10-year yields had a correlation of 0.73 with the Nikkei 225 in the past four weeks, according to Bloomberg data. A value of 1 means the two moved in lockstep. The MSCI World Index rose for a second day yesterday. Bond losses were limited after five-year yields climbed to the highest in almost two months, luring financial institutions that hold huge cash reserves. “Given ample cash, investors may resume buying of mid-term notes shortly, as the securities are apparently approaching their target levels,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc. Five-year yields climbed to as high as 0.64 percent earlier today, the most since Aug. 24, before dropping half a basis point from yesterday to 0.615 percent. Japanese banks are holding onto some 25 trillion yen ($276 billion) to 30 trillion yen of excess cash, according to RuiXue Xu, a strategist at RBS Securities Japan Ltd. in Tokyo. Debt Sales Demand for government bonds also weakened after the Asahi newspaper said Japan’s tax revenue this fiscal year may fall below 40 trillion yen, compared with an earlier estimate of 46 trillion yen. The government will have to sell bonds to make up for the shortfall, the Asahi reported, without saying where it got the information. “Concerns over debt management may push up bond yields temporarily,” said Masashi Shimominami, a Tokyo-based market analyst at Mizuho Securities Co. Japan’s debt burden will probably spiral to 197 percent of gross domestic product next year, according to the Organization for Economic Cooperation and Development. The Finance Ministry in April said it will boost bond issuance by 15 percent to 130.2 trillion yen this fiscal year. To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net.

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