By Yasuhiko Seki Dec. 29 (Bloomberg) -- Japan’s 10-year government bonds advanced, halting four consecutive days of losses, after the yield differential between 2- and 10-year debt securities expanded to the widest in a month. Benchmarkyields declined from the highest level in two weeks on bets that the Bank of Japan will stand pat on interest rates longer than the central banks in other developed economies, to fend off deflationary risk. Gains were tempered after two-year Treasury yields reached the most since September before a report that economists said will show U.S. household sentiment improved in December. “With an exit from the credit easing nowhere near in Japan, short-term notes will continue to stay firm, which will then support the longer-dated bonds,” said Yasuhide Yajima, senior economist in Tokyo at NLI Research Institute Ltd., a unit of Japan’s largest life insurer. The yield of the benchmark 10-year bond fell half a basis point to 1.295 percent as of 3:05 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price of the 1.3 percent bond due in December 2019 rose 0.044 to 100.044 yen. A basis point is 0.01 percentage point. The yield earlier reached 1.305 percent, the highest since Dec. 15. Ten-year bond futures for March delivery advanced 0.15 to 139.53 yen at the afternoon close on the Tokyo Stock Exchange. The spread between 2- and 10-year debt expanded to as much as 114 basis points, the widest since November 11. BOJ’s Rate Outlook “Ten-year yields look attractive,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc. “Dip-buying may slow increases in yields above 1.3 percent.” BOJ Governor Masaaki Shirakawa said in an interview with TV Tokyo last week the central bank will “persistently” keep interest rates at “virtually zero” to fight deflation. The central bank will keep its benchmark interest rate unchanged through 2010, analysts forecast in a Bloomberg News survey. Gains for government bonds were tempered on concerns that signs of a recovery in the U.S. may drive Treasuries yields higher in the near term. Consumer Confidence A report from the Conference Board today will show its index of U.S. consumer confidence rose to 53 this month from 49.5 in November, according to a Bloomberg News survey of economists. A separate report will say U.S. property values in 20 metropolitan areas fell 7.2 percent from a year earlier in October, the smallest 12-month drop since 2007, a Bloomberg survey showed. The benchmark 10-year U.S. note yielded as high as 3.85 percent, near the highest since Aug. 10, according to BGCantor Market Data. “If yields on the U.S. 10-year note approach 4 percent amid signs of recovery, Japan’s 10-year yield may rise toward 1.4 percent,” said Katsutoshi Inadome, a fixed-income strategist in Tokyo at Bank of Tokyo Mitsubishi UFJ Securities Co., a unit of Japan’s biggest banking group. Chicago Futures Futures trading in Chicago showed yesterday a 60 percent chance that the Fed will raise its target lending rate by at least a quarter-percentage point by its June meeting, up from 46 percent odds a week ago. Japanese government bonds have handed investors a return of 0.7 percent so far this year, the smallest gain since 2006, while generating an accumulated income of 20 percent so far since the turn of the century, according to Bank of America Merrill Lynch indexes. Treasuries of all maturities have fallen 3.7 percent this year, while racking up a return of 81 percent over the past decade, 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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