By Theresa Barraclough Dec. 8 (Bloomberg) -- Japan’s 10-year bonds fell for a second day on speculation primary dealers, companies obliged to bid at government debt sales, reduced their holdings to prepare for a sale of five-year notes tomorrow. Benchmark bonds also declined as local stocks advanced on optimism President-elect Barack Obama’s public works program will boost the world’s biggest economy, spurring demand for Japanese exports. The Ministry of Finance will sell 1.9 trillion yen ($20.4 billion) in five-year notes tomorrow in its final sale of the securities this year. “The five-year auction will limit the upside” to bonds, said Tatsuo Ichikawa, a senior strategist in Tokyo at RBS Securities Japan Ltd., a primary dealer. “A rebound in equities” will also weigh on bonds. The yield on the 1.4 percent bond due December 2018 rose two basis points to 1.39 percent as of 5:13 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.176 yen to 100.087 yen. A basis point is 0.01 percentage point. Five-year yields gained half a basis point to 0.885 percent. Ten-year bond futures for December delivery advanced 0.27 to 139.40 at the afternoon close at the Tokyo Stock Exchange. 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. Stock Gains The Nikkei 225 Stock Average advanced 5.2 percent, the biggest gain in two weeks, and the MSCI Asia Pacific Index gained 4.3 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 225 in the past two weeks, according to data compiled by Bloomberg. A value of 1 means the two moved in lockstep. Obama said on a weekly radio speech on Dec. 6 that he’s planning the largest spending program since President Dwight D. Eisenhower created the interstate highway system. Bond futures gained 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. Economists predict the Tankan index will slide to minus 23 points this month from minus 3 in September, a fifth quarter of declines, according to a Bloomberg News survey before the Dec. 15 report. 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. ‘Worsening Tankan’ “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.” Overseas investors sold more Japanese bonds than they bought for a third month in November amid the worst financial crisis since the Great Depression. Sales of the securities exceeded purchases by 1.68 trillion yen last month, according to data released today by the Ministry of Finance in Tokyo. Foreigners sold a net 1.34 trillion yen of Japanese stocks, the largest sale since March. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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