JGBs at new highs as Fed liquidity steps doubted

By Chikako Mogi

TOKYO, March 13 (Reuters) - Japanese 10-year government bond futures hit a 2-½ year high on Thursday, as doubts grew about the impact of the Federal Reserve's latest liquidity measures in easing the credit crisis.

The benchmark 10-year yield also fell to its lowest level in nearly three years as the JGB market drew support from a rise in U.S. Treasuries on Wednesday and a 2 percent drop in Tokyo shares.

Scepticism over the Fed's plan to inject billions of dollars of liquidity in the market kept alive market expectations the Fed would make bold interest rate cuts to try to shore up the U.S. economy.

While market players are watching Japan's political tussle over who will succeed Toshihiko Fukui as governor of the Bank of Japan, their main focus was on the credit crisis.

"The Fed's latest measure was seen as ineffective in resolving the credit market strains, keeping intact investors' flight-to-quality preference," said Akihiko Yokoyama, chief JGB strategist at JPMorgan Securities.

June 10-year futures 2JGBv1 hit a 2-½ year peak of 139.83, up 0.39 point on the day and the highest level since September 2005. The lead contract ended the morning session up 0.29 point at 139.73.

The benchmark 10-year yield <JP10YTN=JBTC> fell 2 basis points to 1.310 percent, after hitting 1.305 percent, its lowest since July 2005. The 20-year yield <JP20YTN=JBTC> held steady at 2.045 percent.

The two-year yield <JP2YTN=JBTC> dropped 1.5 basis points to 0.560 percent, while the five-year yield <JP5YTN=JBTC> fell 3.5 basis points to 0.745 percent.