JGB futures slip from 4-month high on profit-taking

* Futures slip from 4-month peak on profit-taking

* 1.4 pct seen as key resistance for 10-year bond yields

* Market awaits government's economic package

* Drop in 7-year yields signals bond rally overheated

By Rika Otsuka

TOKYO, Aug 27 (Reuters) - Japanese government bond futures slipped from a four-month high on Wednesday, as investors booked profits after a steep rally in the past month and on views that the Bank of Japan is unlikely to cut interest rates.

JGB futures had climbed to a four-month peak on expectations that the Japanese economy would be hurt by a global slowdown -- concerns behind the BOJ's decision to leave interest rates on hold at the current 0.5 percent level.

But investors have come to feel that fresh factors are needed before chasing JGBs.

"Investors have already been finding it difficult to push short- and mid-term yields lower for some time because the BOJ is not seen as lowering rates," said Akihiko Yokoyama, chief JGB strategist at JPMorgan Securities.

"Yields have stopped falling across the curve now," he said.

Traders said seven-year yields, which have the biggest correlation with futures, have almost matched five-year yields in what market players believe is a signal that the futures-led rally may have gone too far.

Futures are likely to outperform cash bonds as long as credit market jitters persist, said Yokoyama.

"But even so, the current levels in seven-year yields are not something that is sustainable for the long term," said Yokoyama. "A correction in seven-year bonds is likely to happen in the near term.

Some traders said futures are also likely to see a correction.

"Futures look extremely expensive now," said a senior trader at a Japanese brokerage.

September 10-year futures dipped 0.14 point to 138.35 2JGBv1. During Tuesday's after-hours trade, the lead futures contract rose as high as 138.80 1JGBv1, its highest since April.

Futures have led the bond rally this week as some market players rushed to cover short positions as the market showed some resilience and Tuesday's 20-year debt auction indicated investor demand remained strong, even after hefty bond gains.

September futures have risen over 3 points in the past month. From this year's low of 132.05 hit in June, the lead contract has jumped more than 6 points.

The benchmark 10-year yield edged up 1 basis point to 1.425 percent JP10YTN=JBTC, staying near a four-month low of 1.405 percent touched on Monday.

The 1.4 percent level has proven to be strong psychological resistance, with analysts saying that the yield would likely stay above that level in the short-term as investors await details of the government's steps to support the economy.

The government is expected to outline an economic package soon, with any extra bond issuance to fund the spending seen as a potential negative for the market.

The two-year yield, the most sensitive to the central bank's monetary policy outlook, edged up 1 basis point to 0.700 percent JP2YTN=JBTC.

Despite more signs that the slower global economy is taking its toll on Japan, a BOJ rate cut is seen as very unlikely because policy rates are already so low. Money market futures are showing little chance of either a rate hike or cut.

BOJ Governor Masaaki Shirakawa said on Monday that central banks should be careful about the negative effects of keeping rates too low. He also downplayed the risk of a lengthy economic contraction. [ID:nT367953]

The five-year yield rose 1.5 basis points to 0.990 percent JP5YTN=JBTC after striking a four-month trough of 0.965 percent in early trade.