By Ron Harui Oct. 30 (Bloomberg) -- Japan's government notes advanced for a second day on speculation the central bank will lower interest rates tomorrow to help revive consumer spending and economic growth. Five-year securities also headed for a monthly gain before government reports tomorrow that economists say will show the jobless rate stayed at a two-year high and household spending fell for a seventh month, the longest run since December 2006. The Federal Reserve yesterday cut borrowing costs for a sixth time this year to avert a recession. ``The Bank of Japan could cut interest rates by 25 basis points,'' said Susumu Kato, chief economist in Tokyo at Calyon Securities, one of the 24 primary dealers required to bid at government debt sales. ``I would expect the JGB market could get some positive influence out of the Fed rate cut and possibly followed by a BOJ cut.'' The yield on the benchmark five-year note fell 3.5 basis points to 0.885 percent at the 1:18 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price of the 1.2 percent security due September 2013 rose 0.165 yen to 101.471. A basis point is 0.01 percentage point. The 10-year yield declined 2 basis points to 1.465 percent and 10-year bond futures for December delivery rose 0.15 to 138.05 on the Tokyo Stock Exchange. Two-Year Auction The government sold $1.8 trillion yen ($18.3 billion) of two-year notes today with a coupon of 0.6 percent. The auction attracted bids for 2.83 times the amount on offer, compared with a so-called bid-to-cover ratio of 3.18 times at the previous sale in September. The lowest price at the sale was 0.014 yen below the average price, compared with a difference of 0.007 in September. 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 demand at the auction declined. The odds that the Bank of Japan will cut rates tomorrow climbed to 60 percent from 46 percent yesterday, according to calculations by JPMorgan Chase & Co. using overnight swaps. Five-year notes had the biggest one-day gain since 1999 yesterday after the Nikkei newspaper said the Bank of Japan is ``leaning toward'' cutting rates by a quarter-percentage point from 0.5 percent. Fed policy makers reduced the target rate for overnight loans between banks by half a percentage point to 1 percent, matching the lowest level in half a century. Jobless Rate Japan's jobless rate remained unchanged at 4.2 percent in September, while household spending dropped 4 percent from a year earlier, according to Bloomberg News surveys of economists. The statistics bureau will release the reports in Tokyo tomorrow. ``Consumers are likely to restrain spending from now on, which may adversely affect the economy,'' said Shinji Kunibe, who helps oversee $847 billion as a senior portfolio manager at JPMorgan Asset Management in Tokyo. ``The short- and medium-end of the curve will probably be supported.'' The five-year yield may decline to 0.75 percent and the two-year yield may drop to 0.40 percent by year-end, Kunibe forecast. To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.

Source