By Yasuhiko Seki May 28 (Bloomberg) -- Japanese bond futures fell for a second day as signs that the global economy is recovering sapped demand for the relative safety of government debt. Futures extended their retreat from a more than two-year year high reached two days ago, before a report today forecast to indicate that U.S. consumer spending increased last month and data next week that may show Japan’s industrial production rose. Bond futures also dropped as stocks gained for a third day on easing concerns over Europe’s debt crisis. “We continue to have hard evidence pointing to a sustained recovery at home and abroad,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest banking group. “Current yield levels are apparently unsustainable.” Ten-year bond futures for June delivery fell 0.01 to 140.45 yen as of the 11 a.m. morning close of the Tokyo Stock Exchange. The yield of the benchmark 10-year bond was unchanged at 1.25 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The Nikkei 225 Stock Average advanced 1.7 percent today. The Standard & Poor’s 500 Index gained 3.3 percent yesterday. Economic Data, Stocks U.S. consumer spending rose 0.3 percent in April, according to a Bloomberg survey of economists before today’s figures. Japan’s factoryoutput gained 2.5 percent in April following a 1.2 percent increase the previous month, according to a separate survey before the report on May 31. Stocks climbed around the world as China’s commitment to investing in Europe allayed concern the debt crisis will worsen. China’s State Administration of Foreign Exchange, or SAFE, which manages $2.4 trillion of foreign-exchange reserves, said in a statement that “Europe has been and will be one of the major markets for investing China’s exchange reserves.” “Once the extreme pessimism about the credit crisis in Europe eases, the flight to safer assets like bonds will reverse, giving stocks a chance to advance,” said Yozo Asai, head of the investment information department at Naito Securities Co. “Stocks were oversold from a viewpoint of macro- and micro-economic fundamentals.” Debt Sales, CPI Bonds also fell before Japan’s Ministry of Finance sells 2.2 trillion yen ($24.2 billion) of 10-year debt on June 1. Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds in case prices decline before they can pass on the new securities to investors. Bond losses were tempered as a government report showed that Japan’s deflation deepened last month. Prices excluding fresh food slid 1.5 percent from a year earlier, after dropping 1.2 percent in March, the statistics bureau said today in Tokyo. The result compares with the median estimate for a 1.4 percent drop in a survey of 23 economists surveyed by Bloomberg News. “Given strong deflationary pressure in Japan, yields won’t rise too much,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Ltd. Japanese debt has still handed investors a return of 3.9 percent in dollar terms this month, according to indexes from Bank of America Corp.’s Merrill Lynch unit. Treasuries have returned 1.4 percent and German bunds have incurred a 5.8 percent loss in dollar terms, the indexes show. Concern that countries such as Greece will default and threaten the existence of Europe’s single currency has helped drive demand for government bonds. Ten-year bond futures for June delivery climbed to 140.84 on May 26, the highest level for a lead contract since March 2008. Ten-year yields slid to 1.19 percent on May 25, the lowest since Dec. 1. To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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