By Theresa Barraclough Oct. 22 (Bloomberg) -- Japan's five-year notes rose by the most in two weeks as traders increased bets the Bank of Japan will cut interest rates this year to support a faltering economy. Five-year yields matched the lowest in more than a week as the Nikkei 225 Stock Average slid on concern corporate earnings will decline. Asian stocks slumped, snapping a two-day rally, as focus shifted from easing credit markets to weakening global economic growth, profits and commodity prices. ``The JGB market may act quite positively to the decline in equities,'' said Susumu Kato, chief economist in Tokyo at Calyon Securities, one of the 24 primary dealers required to bid at government debt sales. ``The weakening domestic economy and the subsiding inflation pressure will be positive for bonds.'' The yield on the 1.2 percent note due September 2013 fell 4.5 basis points to 1.095 percent as of 2:49 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.210 yen to 100.488 yen. The yield is matching the lowest since Oct. 10. Ten-year yields slid 4 basis points to 1.535 percent. A basis point is 0.01 percentage point. Ten-year bond futures for December delivery gained 1.09 to 136.74 at the Tokyo Stock Exchange. The Nikkei 225 lost 6 percent after the Nikkei English newspaper reported that Mitsubishi UFJ Financial Group Inc. missed its profit forecasts. Japan's bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.95 with the Nikkei 225 since the end of last week, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep. BOJ Rate Odds There is a 26 percent chance the BOJ will reduce borrowing costs to 0.25 percent from 0.5 percent by Dec. 31, according to calculations by JPMorgan Chase & Co. using overnight interest- rate swaps. The odds were 20 percent at the end of last week. There was a 64 percent chance yesterday the Federal Reserve will cut rates to 1 percent from 1.50 percent at its Oct. 29 meeting, futures prices show. ``Speculation that the Fed will cut rates next week may increase the odds of a BOJ rate cut,'' said Kazuhiko Sano, chief strategist in Tokyo at Nikko Citigroup Ltd., a Japanese unit of the world's biggest bank by assets. ``It's a bullish environment'' for bonds, he said. Japan's central bank today said it accepted bids for $50.2 billion in loans at an average rate of 2.11 percent in its third dollar operation in an effort to stabilize money markets. The rate that banks charge each other for yen loans fell for a fourth day, suggesting a credit crunch is easing. ``An accommodative monetary policy stance from the BOJ and other central banks supports the short end,'' Calyon's Kato said. Falling Libor The London interbank offered rate, or Libor, that banks charge each other for three-month yen loans dropped 1 basis point to 1.035 percent yesterday, the lowest since Oct. 3, according to the British Bankers' Association. The Fed said it will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions. The new loans program ``should improve the liquidity position of money market investors,'' the Fed said in a statement yesterday. In the U.S., the difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 277 basis points yesterday, the narrowest in almost a month, according to data compiled by Bloomberg. Investors who believe central bank steps to stabilize global money markets will succeed should buy 10-year Japanese government bonds and the same maturity yen swap, RBS Securities Japan Ltd. says. Swap Trade The position would be profitable if ten-year bond yields, slightly below 10-year swap rates, fall faster than the swap rate or rise more slowly, widening the spread. If calm returns to money markets, renewed demand for risk would prevent the yen from rising, removing downward pressure on the 10-year swap rate, RBS Securities predicts. ``The underlying theme behind these trades is that policy measures already taken around the world and the promise to do whatever else is necessary will soon start to become effective,'' said John Richards, head of debt markets strategy for the Asia-Pacific region at RBS Securities. Investors should bet the yield premium of swaps over bonds will expand by buying Japan's 10-year bonds while paying similar-dated swaps, Richards said. The 10-year spread is the narrowest compared to other maturities, making the trade ``look cheap,'' he said, adding, ``It depends on the flight from risk assets to slow down, and so the yen to stay at current levels.'' Ten-year bonds yielded about 2 basis points below similar- dated swaps today, after yielding 9 basis points more on Oct. 10, according to data compiled by Bloomberg. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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