JGBs rise as Nikkei slides, 10-yr yield hits 3-wk low

* JGBs lifted by Treasury rally, Nikkei's fall below 10,000

* BOJ upgrades economic view, keeps rates on hold as expected

* Ten-year yield declines to a three-week low

* Two-year/20-year yield spread tightest in three weeks

By Shinichi Saoshiro

TOKYO, June 16 (Reuters) - Japanese government bond prices rose on Tuesday, with the benchmark 10-year yield hitting a three-week low, boosted by the Nikkei's slide below the 10,000 threshold and a rally in U.S. Treasuries the previous day.

The JGB market brushed aside the Bank of Japan's upgrading of its economic view for the second straight month as the decision had been well anticipated, and as the central bank continued to remain alert towards downside risks facing the economy. [ID:nT50494]

"The bond market drew support from Treasuries and stocks," said a senior bond trader at a European brokerage.

"The Nikkei falling below the 10,000 mark is a clear buy signal for JGBs as investment strategies for Japanese financial markets change depending on which side of that level the Nikkei is at."

With steepening pressure eased by bullish Treasuries and a weaker Nikkei, which had climbed to an eight-month high last week, the spread between the two- and 20-year yields was at 177 basis points, the tightest in three weeks.

The spread had widened to a 3-½ year high of 183 basis points the previous week.

September 10-year futures 2JGBv1 climbed 0.41 point to 136.57.

The two-year yield JP2YTN=JBTC was unchanged at 0.370 percent.

The five-year yield JP5YTN=JBTC declined 2.5 basis points to 0.825 percent.

The 10-year yield JP10YTN=JBTC fell 4.5 basis points to 1.460 percent, its lowest since May 27. It had hit 1.560 percent on Thursday, the highest since Oct. 22.

The 20-year yield JP20YTN=JBTC dropped 3.5 basis points to 2.140 percent ahead of an offering of the same maturity on Wednesday.

At a two-day meeting that ended on Tuesday, the BOJ's policy board voted unanimously to keep interest rates at 0.1 percent.

The central bank did upgrade its economic assessment as rising exports and output have raised expectations the worst of the recession is over, but its cautious tone suggested it was in no hurry to end extraordinary policy measures.

"The prior focus was on the BOJ's economic assessment, which it upgraded for the second straight month. This shows the economy is moving in the direction the BOJ envisioned in its outlook report -- out of its worst phase and headed towards a slow but gradual recovery," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.

"But the BOJ also mentioned downside risks for the economy and said financial conditions remain tough overall although there are signs of improvement. The central bank appears to be indirectly saying that it may be too early to begin discussing exit strategies."

There was some speculation that the BOJ may touch on ways to roll back unconventional monetary policy measures amid rising hopes that the worst of the global crisis is over.

Many countries have eased their monetary policies considerably and compiled massive fiscal spending packages to help their economies combat the crisis.

Hints of a move out of emergency mode were seen at a Group of Eight finance ministers' meeting last weekend, although a concerted move is seen as difficult as the pace of economic recovery varies. [ID:nLF693248]

Tokyo's Nikkei share average .N225 slid 2.9 percent on dampened investor optimism. [.T]

Treasury prices jumped on Monday as the New York Federal Reserve Bank reported a surprising pullback in its measure of regional manufacturing, prompting investors to shift their funds to safe-haven government debt from equities. [US/] (Additional reporting by Rika Otsuka; Editing by Chris Gallagher)