By Theresa Barraclough Nov. 20 (Bloomberg) -- Japan’s 20-year bonds rose, heading for a second weekly gain, after the Bank of Japan held interest rates near zero amid mounting pressure for it to fight deflation. Twenty-year yields held near the lowest in more than a month after BOJ Governor Masaaki Shirakawa and his colleagues held the benchmark overnight rate at 0.1 percent in a unanimous vote. The BOJ can buy more government bonds to help combat deflation as the purchases would provide more liquidity and push up price expectations, Angel Gurria, the secretary general of the Organization for Economic Cooperation, said yesterday. “The BOJ won’t raise interest rates until 2012,” which may help bonds, said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd., one of the 23 primary dealers that are required to bid at government debt sales. “Investors should continue to go long five-year notes,” he said, referring to trades that increase in value when an asset’s price rises. The yield on the 2.1 percent bond due September 2029 fell 1.5 basis points, or 0.015 percentage point, to 2.03 percent as of 12:53 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.214 yen to 100.989. The yield touched 2.025 percent, the lowest since Oct. 13. It has fallen seven basis points this week. Ten-year yields were unchanged at 1.3 percent and five-year yields stayed at 0.585 percent. Ten-year bond futures for December delivery advanced 0.03 to 139.28 at the Tokyo Stock Exchange. On the week, the contracts are up 0.40. Deepening Deflation The difference between rates on five-year notes and inflation-linked debt, which reflects the outlook among traders for consumer prices over the term of the securities, was negative 0.88 percentage point today, from minus 0.82 on Nov. 18. Inflation-adjusted securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation. Deflation, a general drop in prices, enhances the value of the fixed payments from bonds. Consumer prices excluding fresh food dropped for a seventh month in September and the central bank said last month it expects them to keep sliding through fiscal 2011. Twenty-year bonds also gained as the yen approached the strongest level in more than a month versus the dollar, damping the outlook for exporters’ profit. Yen, Stocks Japan’s currency traded at 88.88 yen per dollar from 88.97 in New York yesterday, when it reached 88.64, the strongest since Oct. 9. The Nikkei 225 Stock Average fell 1.1 percent today, heading for a four-week drop. “Given the yen appreciation and the decline in stocks, investors cannot help but to buy bonds,” said Makoto Yamashita, chief Japan interest-rate strategist at Deutsche Securities Inc. in Tokyo. “Also month-end demand from pension funds can be expected as they seek to extend duration.” Duration is a gauge of how much a change in yield affects a bond’s price. Nomura Securities Co. increased the average duration of its Bond Performance Index by 0.07 year to 6.41 years this month, according to the company’s Web site. The duration extension for December will be posted on the company’s Web site toward the end of the month. Money managers such as Japan’s Government Pension Investment Fund, which runs the world’s largest pool of retirement wealth, use the index to help decide their holdings. To contact the reporter on this story: Theresa Barraclough in Tokyo at barraclough@bloomberg.net.

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