JGBs fall on profit-taking after rally

By Chikako Mogi

TOKYO, Feb 7 (Reuters) - Japanese government bonds fell on Thursday as investors took profits from the previous day's rally, but weakness in Tokyo shares renewed safe-haven appetite.

Concerns about a possible U.S. recession and problems with U.S. bond insurers, as well as demand from investors who have not bought JGBs for the current business year, continued to support the market, but players remained wary of pushing yields towards two-year lows hit last month when stocks plunged.

The biggest risk for the U.S. economy is whether bond insurers, seen suffering billions of dollars in losses after insuring repackaged subprime mortgages, can boost capital enough to avoid having their top-notch credit ratings cut, analysts said.

Such ratings downgrades would impact the securities they insure and could cause deeper financial losses, unsettling the financial system anew and hitting fragile stocks.

"The market focus is solely on whether there will be measures taken to rescue the bond insurers, whether such steps would be taken before ratings cuts and whether the government would step in or would leave it to the private sector," said Koji Ochiai, a senior market analyst at Mizuho Securities.

"Market players think U.S. authorities, which have acknowledged the problem, would be forced to do something, but there are also fears there won't be any measures, keeping investors cautious about the market's direction," he said.

March 10-year JGB futures fell as low as 137.70 in early trade but pared some losses to end the morning session down 0.12 point at 137.96 2JGBv1, after ending the day session up 0.88 point at 138.08 on Wednesday.

That marked the biggest one-day rise since Aug. 17 when futures rose 1.22 point on the day in the regular session as the global credit crunch erupted and stocks plunged.