Japanese bonds rose, pushing 10-year yields to the lowest level in seven years, as signs the global economic recovery is faltering boosted demand for the safety of government debt. Bond futures advanced for a fourth day as Asian stocks declined after Moody’s Investors Service said it may downgrade Spain’s credit rating. Bonds also rallied after a report showed China’s manufacturing growth slowed for a second month, adding to signs the world’s third-largest economy is losing momentum. “Concerns over the debt crisis in Europe continue to haunt the market, while prospects of the worldwide recovery are becoming hazy,” said Kazumasa Yamaoka, a senior analyst in Tokyo at GCI Capital Co., an investment advisory firm. “Global money is likely to flood into safer assets such as bonds.” The yield on the 10-year bond fell two basis points to 1.065 percent as of 2:35 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price rose 0.183 yen to 102.115 yen. The yield earlier dropped to 1.06, the lowest since August 2003. Ten-year bond futures for September delivery rose 0.23 to 141.89 on the Tokyo Stock Exchange. The Nikkei 225 Stock Average slipped 1.8 percent after the Standard & Poor’s 500 Index fell 1 percent yesterday. “Deteriorating” growth prospects and challenges in meeting fiscal targets mean Spain’s Aaa classification may be cut by as much as two grades, Moody’s analysts including Senior Vice President Kristin Lindow in New York said yesterday. The review will be concluded within three months, the company said. Default Swaps The cost of protecting Asia-Pacific corporate and sovereign bonds from default increased. The Markit iTraxx Japan index climbed four basis points to 142 basis points, according to Morgan Stanley. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose three basis points to 142.5 basis points, Royal Bank of Scotland Group Plc prices show. Credit-default swap indexes are benchmarks for protecting debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. China’s Purchasing Managers’ Index fell to 52.1 this month from 53.9 in May, the Federation of Logistics and Purchasing said today. The Institute for Supply Management’s U.S. manufacturing index slid to 59 in June from 59.7 the previous month, according to a Bloomberg survey before the report today. ‘Very Nervous’ “Investors are very nervous about developments in China, which has been driving the global recovery, and in the U.S. the world’s biggest economy,” said Takeo Okuhara, a fund manager in Tokyo at Daiwa SB Investments Ltd., a unit of Japan’s second- largest securities broker. Japan’s bonds declined earlier after the central bank’s Tankan survey showed sentiment at the nation’s largest manufacturers climbed to a two-year high. The quarterly Tankan index of sentiment rose 15 points in June to plus 1, the Bank of Japan said in Tokyo. Large companies plan to increase capital spending 4.4 percent in the year ending March 31, the first gain in three years. “From a purely fundamental viewpoint, yields are already too low,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest banking group. Bonds rallied in later trading as the yen strengthened to an eight-week high against the dollar and traded near the strongest level in eight years against the euro. The yen advanced to 88.08 per dollar, the strongest since May 6. The currency climbed to 107.32 per euro on June 29, the highest since November 2001. “For countries like Japan, which depend heavily on exports in delivering growth, an appreciation of the currency will do no good, thereby lending support to the debt market,” said Hirokata Kusaba, a senior economist at Mizuho Research Institute Ltd. in Tokyo.

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