JGBs draw support from sluggish Tokyo shares

By Chikako Mogi

TOKYO, Feb 12 (Reuters) - Japanese government bonds drew support on Tuesday from sluggish Tokyo stocks, but caution ahead of next month's fiscal-year book closings put a cap on gains.

Investors were reluctant to build up JGB holdings before the fiscal year-end on March 31, preferring instead to reallocate funds between different maturities, dealers said.

Lingering speculation of a Bank of Japan interest rate cut this year if the U.S. economy slips into recession and hurts Japan's growth kept support firm for JGBs, but with market players still doubtful of a BOJ rate cut, any rise in prices will likely invite profit-taking, dealers said.

"JGBs continue to get support when stocks fall, but seasonal factors are driving the market right now, with investors not willing to buy bonds actively before the new business year," said Makoto Yamashita, chief JGB strategist at Lehman Brothers.

"They are looking for opportunities to lock in profits. At the same time, with expectations that interest rates will not rise sharply, dealers are stepping in to buy when JGB yields rise. The market is being kept in ranges," he said.

March 10-year JGB futures rose 0.07 point to 138.02 2JGBv1, trading in a narrow 0.14-point range during the morning session in thin volume as Japanese financial markets returned from a national holiday on Monday.

The benchmark Nikkei average .N225 ended the morning session up 0.12 percent.

The two-year yield <JP2YTN=JBTC> eased 1 basis point to 0.540 percent while five-year yields <JP5YTN=JBTC> inched down 0.5 basis point to 0.875 percent.