JGBs soar as Nikkei slide stokes BOJ rate cut talk

TOKYO Jan 22 (Reuters) - Japanese government bond futures jumped to a 28-month peak on Tuesday as Tokyo shares plunged nearly 6 percent following sell-offs in global equity markets that sent investors fleeing for the safety of bonds.

JGBs have surged and stocks have taken a beating on fears that a deteriorating U.S. economy could hurt Japan enough that the Bank of Japan's next policy move might be to cut interest rates from 0.5 percent.

Euroyen futures soared, and the money market started to price in a 30 percent chance of a rate cut in April and a roughly 60 percent chance of a cut in July, according to swap contracts on the overnight call rate JPONIBOJ=TRDT.

"Market participants are starting to see that the BOJ could cut rates this year," said a JGB trader at European investment bank. "The JGB market is so, so strong."

March 10-year futures 2JGBv1 gained 0.36 point to 138.82 after climbing to 138.94, the highest since September 2005.

The BOJ kept rates at 0.5 percent after a two-day policy meeting and said growth was somewhat weaker than it had forecast. [ID:nT43245]

But in a review of its policy framework, the central bank maintained its view that growth was in a positive, self-reinforcing cycle -- the crux of its stated intention to raise interest rates gradually.

Japanese investors had been cautious about chasing yields lower have started shifting funds into long-term bonds before the end of the current fiscal year in March, helping pushing the benchmark 10-year yield to a 28-month low.

Traders said that pension funds were solid buyers of bonds across maturities.

"Bond investors are ignoring levels to chase the market higher after seeing equity markets in Europe and U.S. stock futures sink overnight," said Katsutoshi Inadome, a fixed income strategist at Mitsubishi UFJ Securities.

Benchmark 10-year yields JP10YTN=JBTC sank 5 basis points to 1.315 percent, the lowest since September 2005.

Yields on super-long bonds -- those with maturities beyond 10 years -- fell to one-month lows as some players shifted funds from short-term notes into longer-term bonds, dealers said.

The 20-year yield JP20YTN=JBTC fell 3 basis points to 2.010 percent before an auction of the same maturity later in the week.

The five-year yield JP5YTN=JBTC dropped 4 basis points to 0.780 percent, a two-year low.

The two-year yield JP2YTN=JBTC fell 4.5 basis points to 0.520 percent, a two-year low and only 2 basis points above the target for overnight rates.

June euroyen futures JEYv1 jumped 6 basis points to 99.425 on the mounting possibility of a BOJ rate cut, the biggest one-day rise in five months.

Analysts said investors like big Japanese banks, which had been heavy sellers of bonds as the market surged last year, may be having to add to their holdings as the economic outlook shifts.

Dealers said some players were quick to take profits, but the selling pressure was limited as many try to assess where the next futures peak may be if the stock slide deepens.

The Nikkei .N225 plunged 5.7 percent, the biggest one-day loss since the Sept. 11 attacks, after another rough day as stock sell-offs spread around the globe on growing worries about a U.S. recession. [.T]

US. Treasuries surged in Asia as trade resumed on Tuesday after a U.S. holiday, dragging the two-year yield down 20 basis points on mounting expectations the Federal Reserve could slash rates this week and again at next week's meeting. [US/]

(Additional reporting by Eric Burroughs)