JGBs fall sharply as Nikkei jumps on China report

TOKYO Nov 26 (Reuters) - Japanese government bond futures fell sharply on Monday, pulling away from a 22-month high, as share prices jumped on a report that the Chinese government's investment arm is expected to move some assets into Japanese stocks.

Investors shifted funds to stocks from bonds after the Nikkei business daily reported on Monday that China Investment Corp. (CIC), China's new $200 billion sovereign wealth fund, had begun trying to recruit strategists who specialise in Japanese stocks and other investment products. [ID:nT295336]

A senior CIC official told Reuters on Monday that the fund is still working out its investment strategy and has not yet decided to buy stocks in Japan or any other country. [ID:nPEK300787]

"The (Nikkei's) report on CIC prompted a sell-off in JGBs, which have been largely overbought," said Tetsuya Miura, bond strategist at Shinko Securities.

JGBs have rallied in the past month, with 10-year futures reaching their highest since January 2006, as turmoil in global financial markets has made investors doubt the Bank of Japan will raise interest rates further before the end of the current fiscal year in March.

The BOJ ended its quantitative easing policy of flooding the banking sector with funds, which kept interest rates near zero, in March 2006.

December 10-year futures 2JGBv1 fell 0.51 point to 136.79, after hitting a session low of 136.61. The lead contract climbed as high as 137.53 on Thursday, a 22-month high.

Japanese financial markets were closed on Friday for a national holiday.

The 10-year yield JP10YTN=JBTC jumped 6.5 basis points to 1.480 percent, well above the 1.395 percent reached on Thursday, which was the lowest since September 2005.

The two-year yield JP2YTN=JBTC rose 2 basis points to 0.745 percent, still near the nine-month low of 0.715 percent reached earlier in the month and below the BOJ's 0.75 percent Lombard rate for direct lending to banks.

The five-year yield JP5YTN=JBTC was up 4 basis points at 1.050 percent after falling as low as 1.000 percent on Thursday, a 21-month low.

The 20-year yield JP20YTN=JBTC climbed 5 basis points to 2.045 percent.

The Nikkei share average .N225 ended 1.7 percent higher at 15,135.21.

BOND BULLS STAY

Despite the sharp fall in JGBs, market players see Monday's move as just a correction after a rally in the past month that took bond prices to levels no longer justified by current economic fundamentals in Japan.

"It's too early to say a new trend is emerging for JGBs," said Shiko's Miura.

Traders say bullish sentiment persisted for bonds as global credit jitters continued and concerns grew that the U.S. economy could take a bigger hit from the housing market downturn.

"The JGB market will continue to eye U.S. Treasuries," said a dealer at a Japanese bank. "Given that there is no imminent end in sight to credit woes, Treasury yields are likely to fall further. JGB yields also have more scope for a decline regardless of whether the levels are in line with Japan's fundamentals."

U.S. Treasuries ended mostly lower on Friday as a rebounding stock market curbed the bid for safe-haven U.S. government debt. (Additional reporting by Chikako Mogi; Editing by Mike Miller)