By Yasuhiko Seki May 26 (Bloomberg) -- Japanese bonds fell, pushing 10-year yields up from the lowest level in six months, as gains in stocks reduced demand for the safety of government debt. Benchmark bonds also declined on speculation primary dealers will reduce their holdings before the government sells two-year notes tomorrow and 10-year debt on June 1. Economists say reports this week will show Japanese exports rose for a fifth month and household spending increased, signs the world’s second-largest economy is gaining momentum. “Yields have fallen to levels that are hard to justify from a fundamental viewpoint, so investors will be less aggressive to buy,” said Akitsugu Bandou, senior economist in Tokyo at Okasan Securities Co., one of the 24 primary dealers required to bid at government debt sales. “A slew of economic data suggest that a recovery, despite a rout in global markets, is still at work.” The yield of the benchmark 10-year bond rose 1.5 basis points to 1.205 percent as of 3:36 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due March 2020 fell 0.134 yen to 100.832 yen. Yields declined to 1.19 percent yesterday, the lowest level since Dec. 1. Ten-year bond futures for June delivery gained 0.22 to 140.82 at the Tokyo Stock Exchange. The Nikkei 225 Stock Average rose 0.7 percent. Exports Improve Japan’s exports increased 38.3 percent in April from a year earlier, after surging 43.5 percent in March, according to a Bloomberg survey before the Ministry of Finance report tomorrow. Household spending climbed 2.5 percent, according to a separate survey ahead of the May 28 report. The Finance Ministry will sell 2.6 trillion yen ($28.8 billion) of two-year debt tomorrow and 2.1 trillion yen of 10- year securities next week. Two-year yields rose half a basis point today to 0.16 percent. “If the coupon for the 10-year debt were to be set at 1.2 percent, bond investors may not buy as aggressively as they did in the past,” said Makoto Noji, senior market analyst in Tokyo at Mizuho Securities Co. “They may look for other fixed-income assets which can offer better returns.” Demand for longer-maturity bonds was boosted as Nomura Securities Co. increased the average duration of its Bond Performance Index by 0.16 year to 6.71 years for June. ‘Sharply Lower’ “Month-end index extension sent yields of super-long bonds sharply lower,” said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest banking group in Tokyo. Thirty-year bonds advanced for a second day, with the yield dropping two basis points to 2.025 percent. Japanese debt has handed investors a return of 5.2 percent in dollar terms this month amid concern Europe’s debt crisis will slow global growth. Treasuries have returned 2.3 percent and German bunds have made a 5.3 percent loss, according to indexes from Bank of America Corp.’s Merrill Lynch unit. If concerns about Greece’s debt crisis leads to further gains in government bonds, then Japan’s 10-year yields may fall to 1.155 percent, the lowest since December 2008, said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc., a unit of New York-based Citigroup Inc. To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net.

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