JGB futures inch up as credit jitters hit stocks
* JGBs up, financial worries push stocks down more than 1 pct
* Gains limited after Monday's unexpected surge
* 20-yr bond auction seen OK, institutional investors to buy
TOKYO, Aug 26 (Reuters) - Japanese government bond futures climbed towards a four-month high on Tuesday as renewed worries about the health of the U.S. financial sector spooked investors and spurred selling of stocks.
Gains were limited after JGBs surged unexpectedly the previous day as a bout of short-covering by some speculators caused a frenzy of buying in futures that dragged the entire market with it.
Analysts said the market seems to be settling into a lull around current yield levels, with benchmark yields holding around 1.4 to 1.5 percent as the economy has stalled and the Bank of Japan has made clear it has a neutral policy stance.
BOJ Governor Masaaki Shirakawa reaffirmed that view on Monday, saying in a speech in Osaka 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 BOJ is expected to keep interest rates on hold at 0.5 percent for several months, but a cut is also 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.
For that reason, JGB yields can only fall so far even if yields on U.S. Treasuries keep dropping, analysts said.
Dealers are preparing for an 800 billion yen ($7.3 billion) auction of 20-year bonds during the day.
The sale is not expected to cause too many waves in the market, however, given persistent demand for long-term paper from institutional investors such as life insurers.
"I think we will see good demand for long bonds," said Kenro Kawano, a senior interest-rate strategist at Credit Suisse.
"Life insurers and pension funds realise the worsening condition of the economy, and that means they are not looking for any significant increase in yields."
The coupon was set at 2.1 percent, down from 2.3 percent at last month's issue and the lowest since February.
September 10-year futures 2JGBv1 edged up 0.17 point to 138.27, holding near a four-month peak of 138.39 struck the previous day. Continued...
