By Yasuhiko Seki Nov. 13 (Bloomberg) -- Japanese bonds rose, extending the first weekly advance in more than a month, as the nation’s stocks followed a slump in U.S. equities, boosting demand for the relative safety of government debt. Benchmarkyields approached the lowest level in three weeks after U.S. stock benchmarks fell from 13-month highs and the VIX Index, a measure of market volatility known as Wall Street’s fear gauge, rose the most in two weeks. Gains were tempered before a report next week forecast to show Japan’s economy expanded at a faster pace in the third quarter. “The latest round of a bear market in bonds came to an end,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., a unit of New York-based Citigroup Inc. “Bonds will be boosted by falling stocks.” The yield on the benchmark 10-year bond fell 2.5 basis points to 1.345 percent as of 1:26 p.m. at Japan Bond Trading Co., the nation’s largest interdealer debt broker. It earlier touched 1.33 percent, the lowest since Oct. 19. The price of the 1.4 percent bond due in September 2019 rose 0.217 to 100.477 yen. For the week, the yield fell 10.5 basis points. Ten-year bond futures for December delivery rose 0.36 to 138.85 on the Tokyo Stock Exchange. The Nikkei 225 Stock Average fell 0.3 percent today, heading for a 0.2 percent decline this week. Japan’s bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.6 with the Nikkei last month, according to Bloomberg data. A value of 1 would mean the two moved in lockstep. ‘Bit Bearish’ The Standard & Poor’s 500 Index slid 1 percent yesterday in New York and the Chicago Board Options Exchange Volatility Index, or VIX, rose 5.2 percent, signaling investor concern about the sustainability of the recovery. “Sentiment toward U.S. stocks is becoming a bit bearish,” said Takafumi Yamawaki, senior strategist in Tokyo at BNP Paribas Securities Japan Ltd. “Investors may move to reduce holdings of riskier assets.” Government bonds were poised to end five weeks of declines, the longest stretch since June 2008, on bets the Bank of Japan will keep interest rates on hold when its policy board meets next week. Deflation “Given strong deflationary pressure, the BOJ won’t be able to start hiking interest rates before 2013,” said Junko Nishioka, chief economist in Tokyo at RBS Securities Japan Ltd. “Deflation and low interest rates will offset concerns over swelling debt.” Producer prices dropped for a 10th month in October, a central bank report showed yesterday. The Bank of Japan last month forecast that both wholesale and consumer prices will keep falling through the year ending March 2012, which would mark the third year of declines. Producer prices will probably drop 1.4 percent in the year ending March 2011 and 0.7 percent in the following 12 months, following this fiscal year’s estimated 5.2 percent slide, BOJ board members predicted in their semi-annual report. The central bank will keep the overnight call rate at 0.1 percent at least until the first quarter of 2011, according to a Bloomberg News survey of economists and analysts. Gains in government debt were tempered amid signs the world’s second-largest economy is improving. Japan’s gross domestic product expanded at an annual 2.9 percent pace in the three months ended in September, faster than the 2.3 percent growth the previous quarter, according to a Bloomberg survey of economists before the Cabinet Office releases the data on Nov. 16. “From the viewpoint of a cyclical trend in the economy, there is no strong reason to aggressively buy debt,” said Masashi Shimominami, a Tokyo-based market analyst at Mizuho Securities Co., a unit of Japan’s second-largest banking group. To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net

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