JGBs pull back on Nikkei gains, Treasuries dip

By Eric Burroughs

TOKYO, April 15 (Reuters) - Japanese government bond futures retreated on Tuesday as the Nikkei share average bounced back from a sell-off and tracking a dip in Treasuries overnight on U.S. data showing a surprise rise in retail sales.

Bonds also fell as dealers sold some paper to hedge their books before a 600 billion yen ($5.9 billion) auction of 30-year JGBs later in the session.

Analysts said the coupon of 2.5 percent on the new issue would draw demand as investors seek higher yields further out the curve.

"If I have to buy bonds, I'd rather buy the 30-year," said Freddy Lim, an interest rate strategist at Morgan Stanley.

But bond dealers were also cautious on the outcome after two bad auctions earlier in the month because the severe market volatility in March made it difficult to use futures as an effective hedge in the offerings.

That volatility, sparked by hedge funds rushing to unwind bad positions, also caused sharp swings in long-term yields and swap rates.

JGBs surrendered some of their gains from the previous day as the Nikkei share average .N225 climbed 1 percent, a day after tumbling 3 percent on worries about the U.S. economy after the earnings disappointment delivered by General Electric (GE.N: Quote, Profile, Research, Stock Buzz).

JGBs had been steadily falling on easing fears about the extent of the credit crunch's fallout, which has given a boost to stocks, particularly those of battered financial firms.