By Yasuhiko Seki Dec. 7 (Bloomberg) -- Japan’s 20-year bonds fell for a third day as signs of a global economic recovery boosted stocks, damping demand for the relative safety of government debt. Twenty-year yields climbed to the highest level in three weeks before a report tomorrow that economists said will show Japan’s broadest indicator of economic health advanced for a seventh month in October. Japanese bonds also dropped after two- year Treasuries last week slid the most since August as the U.S. economy lost the fewest jobs in November since the global recession began. “The trading environment is deteriorating against the backdrop of rising stocks and increasing Treasury yields,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., a unit of New York-based Citigroup Inc. “The bond market will extend a correction, as investors carefully watch how far shares will rebound.” The yield of the 20-year bond rose half a basis point to 2.055 percent as of 3:14 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 2.1 percent bond due September 2029 declined 0.071 yen to 100.632 yen. The yield earlier climbed to 2.08 percent, the highest since Nov. 16. A basis point is 0.01 percentage point. The yield of the benchmark 10-year bond held at 1.285 percent after touching 1.305 percent, the highest since Nov. 24. Ten-year bond futures for December delivery were unchanged at 139.91 at the afternoon close on the Tokyo Stock Exchange. Stocks Gain The Nikkei 225 Stock Average rose 1.5 percent. Japan’s bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.49 with the Nikkei 225 in the past two months, according to Bloomberg data. A value of 1 would mean the two moved in lockstep. Japan’s coincident index, a composite of 11 indicators including factory output and retail sales, climbed to 93.8 in October from 92.7 the previous month, according to a Bloomberg News survey before the government releases the report tomorrow. U.S. employers cut 11,000 jobs in November, less than the most optimistic forecast among economists surveyed by Bloomberg News. The unemployment rate fell to 10 percent from a 26-year high of 10.2 percent in October. The yield on the U.S. two-year note rose 15 basis points last week, according to BGCantor Market Data. That’s the most since the five days ended Aug. 7. Fed Policy “The U.S. jobs report spurred speculation that the Federal Reserve Board may seek to hike rates sooner than the market had expected, raising uncertainties over prospects of Treasuries,” said Eiji Dohke, chief strategist in Tokyo at UBS Securities Japan Ltd. “The tailwind from Treasuries came to a halt.” Futures traders raised to 30 percent the probability of an increase in the Fed’s target rate in April from 18 percent a week earlier, according to Bloomberg data. Bonds also fell before Japan’s Ministry of Finance sells 600 billion yen ($6.67 billion) in 30-year debt tomorrow and 2.4 trillion yen in five-year notes on Dec. 10. Primary dealers, who are required to bid at debt sales, often reduce holdings of bonds before an auction in case prices decline before they can pass on the new securities to investors. The Finance Ministry said Oct. 30 it will increase debt sales by 2.1 trillion yen to a record 132.3 trillion yen in the fiscal year ending March 2010. The amount didn’t take into account a shortfall in tax revenue. Yields Attract Bond losses were limited after 10-year yields near a two- week high attracted investors as stocks pared gains. “The rise in yield to a psychologically important level of 1.3 percent triggered buying,” said Masaaki Tonami, a manager of global investments at Sompo Japan Insurance Inc. in Tokyo. The extra yield on 20-year bonds over five-year notes widened to as much as 1.57 percentage points today, the most since July 2004. “Falling fiscal discipline will steepen the yield curve by boosting concerns that the yen will weaken,” said Shinji Nomura, chief bond strategist at Nikko Cordial Securities Inc. in Tokyo. A yield curve is a chart that plots the yields of bonds of the same quality and different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. Japan’s Prime Minister Yukio Hatoyama failed to persuade one of his coalition partners to accept his stimulus package last week, delaying its release. Hatoyama’s plan to announce spending of as much as 4 trillion yen on Dec. 4 was blocked by Financial Services Minister Shizuka Kamei, head of one of the two minority parties that the Democratic Party of Japan needs to smooth the passage of legislation. Kamei called for bigger spending. To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net.

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