By Theresa Barraclough Oct. 21 (Bloomberg) -- Japan's 30-year bonds fell for a second day as reductions in money-market rates and U.S. proposals for an economic stimulus package damped risk aversion, encouraging investors to seek higher returns. Stocks rose. Thirty-year yields climbed to the highest since August as the rates banks charge each other for loans fell, suggesting a global credit crunch may be easing. The Ministry of Finance sold 600 billion yen ($5.9 billion) in 30-year bonds today bearing a 2.4 percent coupon. ``We're seeing an unwinding of excessive pessimism about global stock markets,'' said Takashi Nishimura, an analyst at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets, in Tokyo. ``The stability of the money market and the financial system is encouraging investors to take more risks.'' The yield on the 2.5 percent bond due September 2038 rose 6.5 basis points to 2.41 percent as of 4:28 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price fell 1.149 yen to 101.548 yen. The yield is at the highest since the first week of August. Twenty-year yields added 3 basis points, or 0.03 percentage point, to 2.19 percent and 10-year yields gained half a basis point to 1.585 percent. Ten-year bond futures for December delivery lost 0.07 to 135.65 as of the afternoon close at the Tokyo Stock Exchange. The Nikkei 225 Stock Average gained 3.3 percent after U.S. Federal Reserve Chairman Ben S. Bernanke called for a fresh economic stimulus package to avert a prolonged recession in the world's biggest economy. The White House said it is ``open'' to the idea of a new plan, after the impact of a $168 billion package approved in February faded. Auction Results The Ministry of Finance sale drew bids worth 3.18 times the amount on offer, compared to a so-called bid-to-cover ratio of 3.46 times at the prior auction in July. Last year's average ratio was 3.64 times. The lowest price at the sale was 0.12 yen below the average price, compared with 0.11 yen in July. The so-called tail is the difference between the lowest and the average price. The longer the tail, the fewer bids are clustered around the average price. An increase in the tail may signal that demand at the auction declined. ``On the back of the financial crisis, foreign investors have been unwinding bond positions,'' said Akihiko Inoue, an analyst at Mizuho Investors Securities Co. in Tokyo. Foreign investors sold more Japanese bonds than they bought in each of the last four weeks, according to finance ministry figures based on reports from designated firms. The sales helped push 30-year bond yields higher than similar-dated swaps by the most in at least nine years. Swap Spread The bonds yielded 54 basis points more than similar-dated swaps on Oct. 10, having paid 14 basis points less on average last year, according to data compiled by Bloomberg News. The swap spread is the premium charged over government bond yields to exchange floating for fixed-rate payments. Swap rates are typically higher than bond yields in part because the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor. The finance ministry yesterday said it will increase 20- year bond sales aimed at boosting liquidity and to make up for the reduced issuance of inflation-indexed debt. The ministry will raise sales of 20-year bonds for the year ending March 31 by 500 billion yen to 10.1 trillion yen, it said in a statement. Brink of Recession The demand for five-year notes increased as yields near the highest since July attracted investors amid concern the world's second-largest economy is slowing. ``The outlook for the economy is bad,'' said Satoshi Yamada, a strategist in Tokyo at Nikko Citigroup Ltd., a Japanese unit of the world's biggest bank by assets. ``Yields are declining in the U.S. This is a support'' for the bond market, he said. Five-year yields declined 1 basis point to 1.14 percent, after reaching an almost three-month high of 1.21 percent on Oct. 14, Bloomberg data shows. The Japanese government yesterday cut its evaluation of the economy, acknowledging that the nation has probably entered the first recession in six years. ``The economy has weakened further,'' the Cabinet Office said in a report in Tokyo yesterday. The government downgraded six components of the assessment, the most since April 1998, including exports, industrial production and consumer spending. Libor for three-month yen loans dropped 1 basis point to 1.05 percent yesterday, the lowest in more than two weeks, according to the British Bankers' Association. The difference between the rate and yields on Japanese government bills, the TED spread, narrowed to 43 basis points yesterday, the smallest gap in almost a week, according to data compiled by Bloomberg. ``At last, it looks like the turmoil in credit markets has receded,'' Mitsubishi UFJ's Nishimura said. ``The TED spread has been narrowing; that's a good sign for the economy.'' To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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