By Yasuhiko Seki Jan. 12 (Bloomberg) -- Japanese government bonds rose, halting five consecutive days of losses, as the highest 10-year yields in two months drew investors. Demand for debt also increased after U.S. Treasuries advanced as investors added to bets the Federal Reserve will keep interest rates near zero. The Bank of Japan may increase bond purchases to guard against a relapse into the nation’s deepest postwar recession, according to Pacific Investment Management Co., Morgan Stanley and Nomura Securities Co. “Treasury yields stopped rising, which will be positive for Japanese bonds,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc. “Buying will gradually gain momentum from the current yield level.” The yield of the benchmark 10-year bond fell half a basis point to 1.355 percent as of 3:03 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 0.043 to 99.518 yen. The yield reached 1.365 percent on Jan. 8, the highest level since Nov. 13. Ten-year bond futures for March delivery advanced 0.11 to 138.83 at the Tokyo Stock Exchange. Japanese financial markets were closed yesterday for a public holiday. U.S. 10-year note yields declined three basis points to 3.79 percent, according to BGCantor Market data. Futures on the Chicago Board of Trade showed a 32 percent chance the U.S. central bank will raise its zero to 0.25 percent target lending rate by at least a quarter-percentage point by June, down from 51 percent odds a week earlier. Pimco on BOJ Pimco, which runs the world’s biggest bond fund, said on its Web site that Japan’s central bank may buy “unlimited amounts” of longer-maturity debt as it tries to counter falling prices in the economy. The BOJ already purchases 1.8 trillion yen ($19 billion) of bonds a month and it has cut its benchmark interest rate to 0.1 percent. Japan will hold down borrowing costs, said Shinobu Nakagawa, associate director-general of the international department of the Bank of Japan, speaking yesterday in Shanghai. “Japanese families don’t care about the level of interest rates and they are still willing to put their money into the banks,” Nakagawa said. “There’s the possibility that Japan’s low interest rate level will be kept for a while.” Kan ‘Misunderstood’ Government bonds may bounce back from their worst week since April as the market realizes it “misunderstood” new Finance Minister Naoto Kan’s remarks on fiscal policy, according to Morgan Stanley Japan Securities Co. The remarks at his inaugural press conference on Jan. 7 indicate Kan’s policy isn’t based on increasing spending to bolster the economy, said Atsushi Ito, a Tokyo-based strategist at the unit of the sixth-biggest U.S. lender. “He’s not a fiscal expansionist,” Ito said. “He wants to achieve a policy mix of fiscal austerity, monetary accommodation and a weaker yen.” Asked about the fiscal 2010 budget at the press conference, Kan said he has never thought now is a good time to adopt fiscal austerity. Faced with the global financial crisis and domestic economic slump, compiling a budget to stimulate the economy is a “matter of course,” the finance minister said. Ito forecast 10-year yields will range between 1.2 percent and 1.4 percent in the near term, and five-year yields will move between 0.4 percent and 0.55 percent, according to a report dated on Dec. 8. Yields are approaching the upper end of his forecasts because investors misinterpreted Kan, he said. Prime Minister Yukio Hatoyama last month unveiled a record budget of 92.3 trillion yen for the fiscal year that starts April 1. Total bond and note sales to the market will swell to a most-ever 144.3 trillion yen. Japan’s national debt will expand to an unprecedented 862 trillion yen, 181 percent of the nation’s gross domestic product. The government will sell 44.3 trillion yen of new debt to help fund a revenue shortfall. Limited Gains Gains were tempered as local stocks reversed losses as a report showed China’s imports and exports increased and prices of copper and gold gained, boosting confidence the recovery of the global economy will strengthen. “Investors’ expectations are growing for a further rise in share prices, which could place upward pressure on JGB yields,” analysts including Chotaro Morita, Tokyo-based head of fixed-income strategy research at Barclays Capital, wrote today in a note to clients. “The medium-term sectors, increasingly overvalued due to the BOJ’s easing policies, face the greatest potential upside in yields.” The Nikkei 225 Stock Average added 0.8 percent, while the yield on five-year notes fell half a basis point to 0.510 percent. To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net

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