Japanese 20-year bonds fell for a third day before the Ministry of Finance auctions 1.1 trillion yen ($12.6 billion) of the securities tomorrow. Primary dealers, which are required to bid at government debt sales, often reduce holdings of bonds ahead of auctions in case prices decline before they can pass on the new securities. Futures on 10-year bonds rose as the stronger yen clouded the outlook for corporate earnings and drove down Japanese shares. “The coupon at tomorrow’s auction of 20-year bonds is likely to be lowered to 1.8 percent, the lowest since 2004,” said Akitsugu Bandou, senior economist at Tokyo-based Okasan Securities Co. “I have doubts as to whether bonds with coupons this low will sell well.” The yield on the benchmark 20-year bond rose half a basis point to 1.800 percent as of 1:19 p.m. at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 2 percent security due June 2030 fell 0.076 yen to 102.930 yen. The yield on the 10-year bond was unchanged at 1.090 percent. Ten-year bond futures for September delivery rose 0.04 to 141.65 at the Tokyo Stock Exchange. The Nikkei 225 Stock Average erased an early gain, falling as much as 0.8 percent as the yen strengthened against the dollar. The yen appreciated to as much as 87.07 per dollar from 87.41 at the 9 a.m. opening of stock trading. Japan’s bonds often move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.53 with the Nikkei 225 in the past three months, according to Bloomberg data. A value of 1 means the two moved in lockstep. Lending Demand The previous auction of 20-year securities on June 16 drew bids for 4.6 times the amount on offer, compared with a so- called bid-to-cover ratio of 3.93 in May. Demand for debt was supported on prospects weak corporate borrowing will compel banks to put more money into bonds. An index of demand for loans to businesses slid to minus 17 in July from minus 10 three months ago, the Bank of Japan said today. The number has been negative for five-straight quarters. “Given weak corporate demand for new loans, underlying demand for government bonds from Japanese banks remains strong,” said RuiXue Xu , a Tokyo-based strategist at RBS Securities Japan Ltd., a unit of Royal Bank of Scotland Group Plc. To contact the reporters on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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