JGB futures climb on bargain hunt after 3-day fall

By Rika Otsuka

TOKYO, Dec 26 (Reuters) - Japanese government bond futures climbed on Wednesday as investors hunted for bargains after a three-session slide, while minutes from the Bank of Japan's November meeting showed policy board members talked about increasing downside risks in the U.S. economy.

Several BOJ board members said downside risks in the world's biggest economy were heightening, with one member saying it could worsen more than expected on further adjustment in the housing sector, according to minutes of the central bank's Nov. 12-13 meetting released on Wednesday. [ID:nTKU002944]

The BOJ has kept rates on hold since it raised the overnight call rate a quarter percentage point to 0.5 percent in February.

"The minutes show that the BOJ was already very concerned about the U.S. economy then, providing an excuse for those who wanted to pick up JGBs after a recent slide," said Tetsuya Miura, a bond strategist at Shinko Securities.

BOJ board member Hidetoshi Kamezaki said on Wednesday that uncertainty in the global economic outlook is rising, centring on the U.S. economy, and that central banks need to be careful at such a time. [nTKU002945]

Kamezaki's comments made investors comfortable about buying bonds, although they remained reluctant to bet too heavily before Friday's data on consumer prices, employment and output that will give clues on the BOJ's future policy path.

JGBs have been supported over the past few months as market players have pushed back their expectations on the timing of a further BOJ rate rise.

Many now expect the BOJ to wait to raise rates until the third quarter of next year because of turmoil in global credit markets and signs of an economic slowdown in Japan. [BOJ/INT]

March 10-year JGB futures rose 0.25 point to 136.30 2JGBv1. The lead contract hit a two-week low of 136.05 on Tuesday after rising as high as 137.14 last week, the highest since Dec. 5. Total volume was light at 20,244 lots.

The benchmark 10-year yield fell 2.5 basis points to 1.555 percent JP10YTN=JBTC.

MONTH-END DEMAND

Demand from pension funds looking to extend the duration of their portfolios boosted longer-dated bonds. Pension funds and insurers often adjust portfolio durations around the month-end to match bond holdings to benchmark indexes such as the Nomura BPI.

"Investors have started to extend portfolio durations a bit early as thin volume ahead of the year-end could prevent them from picking up enough bonds at the last minute," said a senior trader at a foreign investment bank.

Traders said demand linked to duration adjustment is likely to support JGB prices in the next two days.

The 20-year yield slid 2 basis points to 2.145 percent JP20YTN=JBTC.

The two-year yield dipped 0.5 basis point to 0.735 percent JP2YTN=JBTC, while the five-year yield was down 2 basis points at 1.055 percent JP5YTN=JBTC. (Editing by Michael Watson)