Japan’s government bonds fell for a third day after demand at an auction of 10-year debt dropped to the lowest level in three months. Benchmark yields rose to the highest in a week as Asian stocks rallied, damping demand for the relative safety of debt. Investors submitted bids for 2.76 times the 2.2 trillion yen ($25.1 billion) of debt the government sold today, down from 3.85 times at the previous auction last month. “The auction turned out be weaker than expected,” said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest banking group in Tokyo. “An upturn in the equity market also drove the debt market lower.” The yield on the 10-year bond rose 2.5 basis points to 1.13 percent, the highest since June 29, as of 3:10 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.3 percent security due June 2020 fell 0.228 yen to 101.520 yen. Ten-year bond futures for September delivery declined 0.13 to 141.44 at the afternoon close on the Tokyo Stock Exchange. The MSCI Asia Pacific Index of shares rose 1.2 percent, its biggest gain in two weeks. The gauge has still fallen 12 percent from its high this year on April 15 on concern Europe’s debt crisis and China’s steps to curb property prices will hurt global growth. China’s Shanghai Composite Index climbed 1.4 percent, rebounding from a 15-month low. Riskier Assets “From a valuation viewpoint, it would not be a surprise if investors started to consider getting back into riskier assets,” said Shigeo Kikuchi, an equity manager at Takagi Securities Co. in Tokyo. Bonds gained earlier after a report showed China is on course for its biggest annual increase in Japanese debt holdings since at least 2005. China’s purchases of Japanese bonds exceeded sales by 541.1 billion yen ($6.2 billion) from January to April, after net sales of 78.7 billion yen during 2009, according to ministry data released June 8 and reported in the Nikkei newspaper today. “Japanese government bonds aren’t attractive but have little risk to be sold off by overseas investors,” said Hiroshi Morikawa, a senior strategist in Tokyo at MU Investments Co., which manages about $14 billion. “The news about China’s purchases may encourage domestic investors to buy more government bonds.” Annual Return Ten-year yields fell to 1.055 percent on July 1, the lowest since August 2003. Japan’s government bonds handed investors a return of 2.2 percent between January and June, the best first half since 2001, according to an index compiled by Bank of America Corp’s Merrill Lynch & Co. unit. The decline in bonds was also tempered before reports that economists said will show Japan’s machine orders fell and growth in German factory demand and U.S. service industries slowed. “There is emerging concern that the global economy is coming to a standstill, as the effects of stimulus measures wane,” said Kazuto Uchida, chief economist at Bank of Tokyo Mitsubishi UFJ Ltd. in Tokyo. “Bonds will continue to draw decent demand.” The Institute for Supply Management’s index of U.S. non- manufacturing businesses, which makes up almost 90 percent of the U.S. economy, declined to 55 in June from 55.4 a month earlier, according to a Bloomberg survey before today’s report. German factory orders rose 0.3 percent in May after surging 2.8 the previous month, and Japan’s machinery orders declined 3 percent in May, after increasing 4 percent in April, separate surveys showed before this week’s reports. To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net; Masaki Kondo in Tokyo at Mkondo3@bloomberg.net.

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