By Yasuhiko Seki Dec. 28 (Bloomberg) -- Japanese bonds fell for a fourth day as signs of economic recovery in Asia spurred buying of riskier assets. Benchmark 10-year yields rose to the highest level in almost two weeks after a Japanese government report today showed industrial output rose at a faster pace in November. Asian stocks advanced after China raised its 2008 growth estimate, sapping demand for the relative safety of the government debt. “A strong showing of industrial production data means that the risk of the Japanese economy slipping into a double-dip recession is receding,” said Tatsushi Shikano, senior economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest banking group. “Bonds may become vulnerable.” The yield of the benchmark 10-year bond rose two basis points to 1.290 percent at 12:43 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield was the highest since Dec. 15. The price of the 1.3 percent bond due in December 2019 fell 0.177 to 100.088 yen. A basis point is 0.01 percentage point. Ten-year bond futures for March delivery dropped 0.21 to 139.53 yen at the Tokyo Stock Exchange. Japan’s government today said industrial output rose 2.6 percent in November, a ninth-straight increase. Economists had forecast a 2.5 percent gain. Industrial Output Renewed demand in Asia is encouraging companies including Fuji Heavy Industries Ltd. and Suzuki Motor Corp. to increase production. The gains in factory output may ease concern Japan’s economic recovery will stall after a government report this month showed companies plan deeper spending cuts this year. “Weak domestic demand means that the Japanese economy is still highly vulnerable to external shocks,” said Ryutaro Kono, chief economist at BNP Paribas in Tokyo. “But strong exports to Asia should help ease the pain of Japan’s upcoming soft patch.” Exports to China and Asia rose in November for the first time since September 2008, according to a Finance Ministry report released last week. Shipments to Asia advanced 4.7 percent in November from a year earlier, while exports to China climbed 7.8 percent. China on Dec. 25 raised its 2008 growth estimate to 9.6 percent from 9 percent and said this year’s quarterly figures will increase. The MSCI Asia Pacific Index of regional shares advanced 0.9 percent and the Nikkei 225 Stock Average gained 1.3 percent. Widening Spread Bonds also declined after the spread between U.S. and Japanese debt expanded to the widest level in two years, making the yen-denominated securities less attractive. The benchmark 10-year Treasury yield touched 3.81 percent in New York on Dec. 24, the highest since Aug. 10, according to BGCantor Market Data. U.S. financial markets were closed on Dec. 25 for a public holiday. “If U.S. yields approach 4 percent on recovery signs, Japan’s bonds may react negatively,” said Shinji Nomura, chief bond strategist at Nikko Cordial Securities Inc. in Tokyo. The spread between 10-year Treasury yields and the same maturity Japanese government bonds reached 253 basis points on Dec. 24, the widest gap since December 2007. Bond losses were tempered after a report last week showed the government will sell less debt than dealers had expected. Issuance to investors such as banks and life insurers will total a record 144.3 trillion yen ($1.6 trillion) in the fiscal year starting April 1, the Finance Ministry said after the market closed on Dec. 25. The forecast of primary dealers in a Bloomberg survey was for 145.2 trillion yen in sales. “The government’s announcement helps soothe concerns over the deterioration of supply and demand conditions,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc. “We may see a bull run.” Japanese government bonds have handed investors a return of 0.9 percent so far this year, the smallest gain since 2006, according to Bank of America Merrill Lynch indexes. To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net

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