TOKYO (Bloomberg) -- Japan’s 20-year bonds rose the most in 17 months as concern Europe’s fiscal crisis is worsening boosted demand for the relative safety of government debt.

Benchmark 10-year yields touched the lowest level since December before Treasury Secretary Timothy F. Geithner visits Germany and the U.K. next week to discuss the European debt situation. Five-year yields touched levels unseen since 2005 as stocks slid and the Bank of Japan kept interest rates near zero on Friday. The BOJ conducted its third same-day operation this month to boost liquidity and said it would provide one-year loans to banks to encourage lending and defeat deflation.
“As the situation remains unclear about the fiscal crisis, not only domestic investors but also foreign investors are buying Japan’s government bonds,” said Akio Kato, team leader of Japanese debt at Kokusai Asset Management Co. in Tokyo, which runs the $40 billion Global Sovereign Open fund.
The yield on the 2.1 percent bond due March 2030 fell 8.5 basis points to 2.005 percent this week in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. It was the biggest weekly drop since December 2008. The price rose 1.207 yen to 101.347 yen. The yield on Friday touched 2 percent, the lowest since Dec. 3. A basis point is 0.01 percentage point.
Ten-year yields declined six basis points to 1.235 percent this week, after reaching 1.22 percent on Friday, a level unseen since Dec. 21. Five-year yields fell four basis points to 0.415 percent this week after touching 0.4 percent on Friday, the lowest since June 30, 2005.
Ten-year bond futures for June delivery gained 0.55 this week to 140.40 at the Tokyo Stock Exchange.
---------------‘Global money flow’
“Global money flow is clearly shrinking and people don’t see when it will halt,” said Tetsuya Miura, chief market analyst in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group. “That’s prompting people to buy longer-term bonds. When you look at the yen’s surge, the situation is very positive for JGBs.”
The lowest price at an auction of 20-year bonds on May 20 was higher than traders forecast and matched the average cost for the first time since at least 1987. The lowest price was 100.35 yen, higher than the 100.25 predicted by 12 traders in a Bloomberg News survey. The lowest and the average price matched, showing a consensus among investors on the debt’s cost.
----------------Deflator falls
Demand for Japan’s longer-dated debt increased after a Cabinet Office report on May 20 showed the deflator, used to calculate economic growth adjusted for price changes, dropped 3 percent in the first quarter from a year earlier. The measure has only risen twice in the past 47 quarters going back to 1998. Deflation enhances the value of the fixed payments from debt.
The yield differential between two- and 20-year bonds narrowed to about 186 basis points from this year’s high of 203 basis points on March 18.
Japan’s central bank maintained the key rate at 0.1 percent on Friday at the end of a two-day policy meeting. The bank said it will provide one-year loans at 0.1 percent to lenders, who will need to submit proposals on how the funds will go to projects that can bolster economic growth.
Before the rate decision, the BOJ offered to add 1 trillion yen ($11.1 billion) to the financial system as Europe’s debt crisis pummeled stock markets worldwide and pushed the yen to an eight-year high versus the euro. The central bank’s same-day operation was the third this month, boosting the total amount of injected funds to help stabilize financial markets to 5 trillion yen.