JGB futures edge up as stocks fall, Treasuries rise

By Rika Otsuka

TOKYO, May 8 (Reuters) - Japanese government bond futures edged up on Thursday as investors took their cue from a fall in share prices and an overnight rally in U.S. Treasuries.

The Nikkei share average .N225 fell 0.7 percent .N225, retreating from a four-month closing high posted the previous day.

"JGBs are due for a rebound," said Tetsuya Miura, a bond strategist at Shinko Securities. "The market is weighed down by psychological damage due to a bond slump in April, as well as global inflation fears. But those factors are not enough to keep pushing up JGB yields."

June 10-year futures climbed 0.12 point to 135.59 2JGBv1. The lead contract struck five-year peaks around 142.00 in mid-March then plunged to near 134.50 late last month as expectations for a rate cut by the Bank of Japan receded, with some even switching their sights towards an eventual BOJ rate rise.

The yield on the current 291st 10-year bond dipped 0.5 basis point to 1.660 percent JP10YTN=JBTC. The benchmark yield hit a seven-month high of 1.680 percent on Wednesday.

Gains were limited as market participants were cautious about picking up JGBs too much ahead of a closely watched 10-year debt auction later in the day.

The MOF's 1.9 trillion yen ($18.2 billion) sale of benchmark 10-year JGBs is seen as a gauge of demand for government debt about two weeks after JGB futures suffered their steepest one-day drop in five years.

The coupon is expected to be set at 1.6 or 1.7 percent, up from 1.3 percent at last month's auction of the same maturity. Either would be the highest since 1.7 percent at a 10-year auction in November 2007.

A higher yield is expected to attract demand from investors who look at absolute yield levels, such as life insurers and pension funds. But many are worried that other investors will stay reluctant to buy as a bond sell-off in the past few weeks has cooled demand for JGBs.

U.S. Treasuries rallied on Wednesday as a surge in crude oil prices CLc1 to record highs above $123 per barrel exacerbated fears about economic weakness, hurting stocks and reviving Treasuries' "safe haven" appeal. ($1=104.66 Yen) (Editing by Michael Watson)