By Theresa Barraclough Oct. 20 (Bloomberg) -- Japan's government bonds gained, reversing a decline, on speculation 10-year yields near the highest level in almost three months attracted investors. The securities gained for a second day after Bank of Japan Governor Masaaki Shirakawa said the nation's economy will remain ``sluggish'' for the time being. His comments came amid concern a U.S. recession will spill over into the world's second-largest economy. The Ministry of Finance will sell 600 billion yen ($5.9 billion) in 30-year bonds tomorrow. ``People are worried about the economic downturn in the near term, so dip buying is a good strategy,'' said Keiko Onogi, a debt strategist in Tokyo at Daiwa Securities SMBC Co., one of the 24 primary dealers required to bid at government debt sales. ``Some investors may find the 10-year yield attractive.'' The yield on the 1.5 percent bond due September 2018 fell 4 basis points to 1.53 percent at the 11:05 a.m. morning close in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.342 yen to 99.741 yen. The yield reached 1.63 percent on Oct. 14, the highest level since July 24. Five-year yields dropped 4.5 basis points, or 0.045 percentage point, to 1.095 percent. Ten-year bond futures for December delivery rose 0.55 to 136.30 on the Tokyo Stock Exchange. ``The Bank of Japan must carefully monitor how global financial-market turmoil will affect Japan's markets as well as economic growth at home and abroad,'' Shirakawa said today in a speech at a quarterly meeting of the central bank's branch managers in Tokyo. Rate Bets There is a 24 percent chance the BOJ will lower borrowing costs to 0.25 percent from 0.5 percent by year-end, according to calculations by JPMorgan Chase & Co. using overnight interest- rate swaps. The odds were 20 percent at the end of last week. The global financial crisis remains out of control and the U.S. and Europe must do more to fix the problem, Japan's Finance Minister Shoichi Nakagawa said yesterday. ``I don't think there's a sense we're near the end,'' Nakagawa said in an interview with public broadcaster NHK. ``More policy action needs to be taken in the U.S. and Europe.'' Bonds fell earlier on concern demand will weaken at the sale of 30-year bonds tomorrow. Meiji Yasuda Life Insurance Co., Japan's third-largest life insurer, said on Oct. 9 it plans to cut domestic bond holdings by 250 billion yen this fiscal year. `Steepening' ``There's a lot of concern about the 30-year auction,'' said Akihiko Inoue, an analyst at Mizuho Investors Securities Co. in Tokyo. ``A steepening of the yield curve in the longer-dated zones is expected,'' he said, referring to a situation where yields on longer-maturity bonds rise faster than those on shorter-dated ones. A yield curve is a graph that plots the yields of bonds of the same quality with different maturities. The difference in yield between five- and 30-year debt expanded to about 1.21 percentage points on Oct. 17, the widest in almost two weeks, according to data compiled by Bloomberg. The previous sale of 30-year bonds on July 17 drew bids for 3.46 times the amount on offer, compared with a so-called bid- to-cover ratio of 3.92 at the April sale. Last year's average ratio was 3.64 times. Pre-auction trading suggests the finance ministry will set a 2.2 percent coupon on the new 30-year debt, the lowest since February 2004. The coupon was 2.5 percent at the prior sale. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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