JGB 10-year yield slips in thin FY-end trade

By Masayuki Kitano

TOKYO, March 28 (Reuters) - The benchmark 10-year Japanese government bond yield slipped back towards three-year lows on Friday in thin trade ahead of Japan's fiscal year-end on March 31.

JGBs were supported by lingering fears of a U.S. recession and doubts about the outlook for the Japanese economy, which have led to market expectations that the Bank of Japan seems more likely to cut interest rates this year than raise them.

But activity was subdued as investors took a breather after recent market swings and as they turned their focus to key events next week, including the BOJ's tankan survey on business sentiment and U.S. jobs data, analysts said.

"The JGB market is now at expensive levels, and there is some nervousness among investors," said Akitsugu Bandou, senior strategist of Okasan Securities.

But the mood may change and JGBs could extend gains if the tankan and the U.S. employment data come in weak and lead traders to consider more seriously the possibility of the Bank of Japan lowering interest rates, he said. The quarterly tankan is expected to show a sharp deterioration in corporate sentiment due to the global credit crisis, rises in raw material costs and a fall in the dollar. [ID:nT329191]

The tankan will be released on Tuesday, the same day as a 10-year JGB auction. The U.S. jobs data is due next Friday.

The benchmark 10-year yield fell 2 basis points to 1.250 percent <JP10YTN=JBTC>, edging back towards a three-year low of 1.215 percent hit on Wednesday.

Swap contracts on the overnight call rate show that investors now see a roughly 50 percent chance of the BOJ lowering interest rates from the current 0.50 percent by the end of the year. <JPONIBOJ=TRDT>