Japanese bonds gained for a third day as violence in Libya pushed up crude oil prices, fueling speculation global economic growth will slow. Ten-year yields dropped to the lowest level in three weeks after crude climbed to $100 a barrel in New York yesterday for the first time in two years, spurring demand for the safety of debt. Bonds also climbed after demand for safe-haven currencies boosted the yen against most of its 16 major counterparts, triggering a slump in domestic stocks. “Investors started shifting focus to the negative aspect of surging oil prices and that it will cause the deterioration of economic activity,” said Tadashi Matsukawa, fixed-income head at PineBridge Investments Japan Co. in Tokyo, which manages the equivalent of $2.1 billion in bonds. “This seems to be a factor that’s giving some support to long-term bonds.” The 10-year yield fell two basis points to 1.225 percent as of 3:35 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.2 percent security maturing in December 2020 rose 0.175 yen to 99.781 yen. The yield earlier reached 1.22 percent, the lowest level since Feb. 2. The three-day gain in 10-year bonds was the longest winning streak since Jan. 12. Ten-year bond futures for March delivery advanced 0.09 to 139.79 at the 3 p.m. close of the Tokyo Stock Exchange. Two-year yields were unchanged at 0.22 percent after a 2.6 trillion-yen ($31.7 billion) auction of the securities today drew bids valued at 3.7 times the amount on offer, down from a so-called bid-to-cover ratio of 5.33 in January. Flight to Safety Oil surged in London to the highest in almost 30 months on concern unrest in the Middle East will disrupt supplies. Loyalists of Libyan leader Muammar Qaddafi sought to crush dissent in Tripoli as his opponents tightened control of eastern cities. Libya is Africa’s third-biggest oil producer. The Nikkei 225 Stock Average sank 1.2 percent as the yen gained to 81.98 per dollar, the strongest since Feb. 8. A higher yen decreases the value of overseas sales at Japanese companies. “The stock market is weak with heightening tension in the Middle East,” said Ayako Sera, a strategist in Tokyo at Sumitomo Trust & Banking Co., which manages about $331 billion in investments. “Risk aversion is dominating the market, and money is flowing into the bond market.” Royal Bank of Scotland Group Plc, one of the 24 primary dealers obliged to bid at Japan’s debt sales, recommends buying shorter-term securities once the yield spread between two-year notes and 10-year debt narrows to less than 100 basis points. The yield gap was at 100.5 basis points today. “It is important to be aware of 100 basis points as a key threshold for the 2-year to 10-year spread,” Akito Fukunaga, chief rates strategist in Tokyo at Royal Bank of Scotland’s brokerage unit, wrote in a note today. To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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