JGBs higher on rise in Treasuries, sluggish stocks

By Chikako Mogi

TOKYO, Oct 3 (Reuters) - Japanese government bonds rose on Wednesday, taking their cue from higher U.S. Treasuries the previous session and sluggish Tokyo shares.

Expectations that investors would buy to allocate funds to JGBs for the start of the fiscal second half from Oct. 1 and views that the Bank of Japan would not raise interest rates anytime soon continued to support sentiment, traders said.

Due to a lack of key economic data or events this session, traders said players were looking to other markets for direction.

"The JGB market is up primarily because of a rise in the Treasury market. Sluggishness in Japanese stocks, after a jump in prices the previous session, is also supportive," said Chotaro Morita, interest rate strategist at Deutsche Securities.

Some traders said hedge selling ahead of an auction of 10-year consumer price index-linked JGBs on Thursday weighed on the market.

The Ministry of Finance will offer 500 billion yen ($4.33 billion) in CPI-linked bonds, with traders expecting a 1.3 percent coupon.

December 10-year futures 2JGBv1 were up 0.15 point at 135.04 while the benchmark 10-year JGB JP10YTN=JBTC yield fell 0.5 basis point to 1.680 percent.

The five-year yield JP5YTN=JBTC fell 1 basis point to 1.195 percent and the 20-year yield JP20YTN=JBTC eased 0.5 basis point to 2.195 percent.

The Nikkei share average .N225 was barely changed, after finishing at a 2-month high on Tuesday.

U.S. Treasuries rose on Tuesday after dismal housing data underpinned hopes for a Federal Reserve interest rate cut at the month-end.

Pending sales of previously owned homes fell a surprising 6.5 percent in August as buyers struggled to get loans, indicating the housing market slump could worsen.

The JGB market is expected to remain in ranges as investors look for clues over the extent of damage to the U.S. economy from the subprime mortgage market problems and a credit squeeze, which would determine the Fed's future monetary easing. Investors were also assessing whether inflation risks are rising, analysts said.

"Scenarios for the second half vary widely from investor to investor, making it difficult to pin down what levels investors see best for buying," Morita said.

Many players appear to be eager to buy when 10-year yields rise above 1.7 percent, while few are expected to wait until yields rise closer to 2.0 percent for dip-buying, he said.

The 10-year JGB yield moved between 1.5 and 2.0 percent in the April-September first half of the fiscal year.