Japanese bonds fell the most in two weeks before U.S. reports that economists said will show service industries expanded in February and employers stepped up hiring. Ten-year bonds dropped for the fourth time in five days after Japan’s Finance Ministry said companies increased spending for a second quarter, signaling confidence in the nation’s recovery. Treasuries dropped for a second day after the Federal Reserve said in its Beige Book report yesterday that the overall U.S. economy expanded “at a modest to moderate pace.” “Should U.S. nonfarm payrolls play catch-up to other economic data, Japan’s yields may test higher levels,” said Akito Fukunaga, chief rates strategist at the brokerage unit of Royal Bank of Scotland Plc., Britain’s biggest government- controlled lender. “Bonds are being sold following the decline in Treasuries.” The yield on the 10-year bond climbed three basis points to 1.29 percent as of 3:41 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price declined 0.267 yen to 100.088 yen. The drop was the biggest for a benchmark bond since Feb. 16. Ten-year futures for March delivery slipped 0.16 to 139.54 at the afternoon close on the Tokyo Stock Exchange. Ten-year Treasury yields rose two basis points to 3.49 percent. Spending Increases Capital spending by Japanese companies rose 4.8 percent in the three months ended Dec. 31 from a year earlier, the same amount as the previous quarter, the Finance Ministry said today. The U.S. Institute for Supply Management’s non-manufacturing gauge will show 59.3 for February after a 59.4 reading for January that was the highest since 2005, according to a Bloomberg survey before today’s data. A number greater than 50 signals growth. American employers hired 195,000 workers in February, after adding 36,000 the month before, a separate survey showed before tomorrow’s Labor Department report. Bank of Japan board member Tadao Noda said the central bank stands ready to take “appropriate” policy action should risks to the nation’s recovery emerge. “We are determined to implement flexible and appropriate policies if the path for ending deflation becomes uncertain or the outlook for the economy and prices changes dramatically,” Noda said today in Kumamoto, southern Japan. Oil Prices The decline in bonds was tempered by speculation unrest in the Middle East and North Africa will drive up oil prices, hampering global growth. Libyan forces loyal to Muammar Qaddafi counter-attacked rebels in the coastal region where much of the country’s crude is refined or shipped abroad, according to a local oil official. Qaddafi, speaking on state television yesterday, said his government retains control of oil fields. Crude oil for April delivery rose as much as 0.7 percent today after closing yesterday at $102.23 a barrel in New York, the highest settlement since September 2008. “Further gains in oil may stoke concern about the global economy,” Chotaro Morita, chief strategist at Barclays Capital Japan Ltd. in Tokyo, wrote in a note to clients. The yield curve “is under pressure to flatten from an economic stand point.” A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It flattens when yields on longer-maturity bonds fall, those on shorter-dated notes rise, or both happen simultaneously. To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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