Aug. 5 (Bloomberg) -- Japanese bonds fell, lifting 10-year yields from a seven-year low, as stocks advanced after Toyota Motor Corp. raised its full-year profit forecast.

Benchmark 10-year yields, which yesterday fell below 1 percent for the first time since August 2003, gained before a government report that economists say will show business conditions are improving. The Ministry of Finance will sell 300 billion yen ($3.47 billion) in 40-year bonds today.

"Ten-year yields below 1 percent aren't a 'flight to quality' but a 'speculative investment in quality'," Shinji Nomura, chief debt strategist at Nikko Cordial Securities Inc., wrote in a report today. "This may be the last time for 10-year yields to fall below 1 percent in history, and I think this is a great opportunity to sell."

The yield on the benchmark 10-year bond added two basis points to 1.015 percent as of 9:19 a.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The 1.1 percent security due June 2020 fell 0.182 yen to 100.761 yen.

Ten-year bond futures for September delivery lost 0.14 to 142.15 at the Tokyo Stock Exchange.

Shares of Toyota, the world's largest automaker, jumped 2.4 percent in Tokyo after boosting its annual net income projection by 9.7 percent yesterday.

The Nikkei 225 Stock Average climbed 2.1 percent, buoyed by the Institute for Supply Management's report yesterday that showed its index of U.S. service industries gained in July, while economists had estimated the gauge would drop.

'Excessive Pessimism'

"Japan's bond market will likely open lower as excessive pessimism about the U.S. economy eases," Nikko's Nomura wrote before markets opened in Tokyo.

Japan's leading index of business conditions rose to 98.7 in June from 98.6 the previous month, according to economists' estimates before the report tomorrow. That would be the first gain in three months.

The prior sale of Japanese 40-year bonds in May drew bids for 2.57 times the amount on offer, compared with a so-called bid-to-cover ratio of 3.78 in January. 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.
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source: www.sfgate.com