By Theresa Barraclough Dec. 8 (Bloomberg) -- Japan’s 10-year bonds rose, extending four weeks of gains, on speculation a report next week will show manufacturers grew more pessimistic than in any month since March 2002, adding to signs the recession will deepen. Benchmark yields approached the lowest since April as economists estimated the Tankan index on Dec. 15 will slide to minus 23 points this month from minus 3 in September, a fifth quarter of declines. The current-account surplus narrowed for an eighth month in October as a deepening global slowdown crimped export revenue, the Ministry of Finance said today in Tokyo. “Investors are still holding JGBs because of the expectations for a worsening Tankan,” said Takashi Nishimura, an analyst in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “JGBs still have room for yields to decline.” The yield on the 1.4 percent bond due December 2018 fell one basis point to 1.36 percent as of 1:19 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.088 yen to 100.351 yen. The yield is two basis points shy of matching the lowest since April. A basis point is 0.01 percentage point. Five-year yields declined 1.5 basis points to 0.865 percent. Ten-year bond futures for December delivery gained 0.40 to 139.68 at the Tokyo Stock Exchange. Bonds also advanced after a central-bank report today showed companies borrowed more from Japanese banks for a second month in November as the global credit crunch shut off other funding avenues. Bank Loans Loans, excluding those by credit associations, rose 3.6 percent from a year earlier after growing 2.3 percent in October, the Bank of Japan said in Tokyo. Yields on one-month commercial paper with the second- strongest credit rating rose to 1.9 percent today, more than double the Tokyo interbank offered rate for yen loans, according to Tokyo Tanshi Co. Tibor climbed to 0.903 percent today, the 21st day of gains, Bloomberg data show. “Corporations rely on banks for money as they cannot depend on commercial paper and it shows how bad the corporate sector is,” Mitsubishi UFJ’s Nishimura said. “The bullish bond sentiment will continue.” The Ministry of Finance will sell 1.9 trillion yen ($20.5 billion) in five-year notes tomorrow in its final sale of the securities this year. “It’s hard to expect yields to back off to a 1 percent coupon level,” said Akihiko Inoue, an analyst at Mizuho Investors Securities Co. in Tokyo. The coupon “is likely to be 0.9 percent.” Primary Dealers Primary dealers, companies obliged to bid at government debt sales, tend to reduce holdings of bonds in case prices decline before they can pass on the new securities to investors. The previous five-year auction on Nov. 11 drew bids for 3.32 times the amount on offer, compared with a bid-to-cover ratio of 3.04 at the October sale. Last year’s average ratio was 3.45 times. “The five-year auction will limit the upside,” said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., also a primary dealer. “A rebound in equities” will also weigh on bonds. Demand for bonds may also be limited as the Nikkei 225 Stock Average rebounded following a two-day drop, reducing the demand for the safe haven of debt. The Nikkei 225 advanced 4.5 percent and the MSCI Asia Pacific Index gained 4 percent. Japan’s bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.78 with the Nikkei in the past two weeks, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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