JGBs slide on Treasuries, Fed view pushes yields up

By Naomi Tajitsu

TOKYO, March 23 (Reuters) - Japanese government bonds slipped on Friday after U.S. Treasuries fell due to doubts over whether a softening in the Federal Reserve's rate tightening bias would translate into a rate cut in the near term.

JGBs erased gains from the previous session as investors trimmed long positions in last-minute adjustments to their portfolios ahead of Japan's financial year-end next week, but the 10-year yield hovered in range of a 13-month low hit on Thursday.

"Given yesterday's gains, we're seeing a bit of profit-taking by short-term investors," said Hidenori Suezawa, chief fixed income strategist at Daiwa Securities SMBC. He said flows were light early in the session.

A 0.2 percent gain in the Nikkei average .N225 also helped to put some selling pressure on JGBs while dealers awaited the results of a two-year auction later in the session.

June futures 2JGBv1 were down 0.21 point at 134.69 by the end of the morning session after hitting the day's low of 134.63.

The benchmark 10-year yield JP10YTN=JBTC rose 3 basis points to 1.575 percent, pulling away from 1.545 percent touched on Thursday for the first time since late February 2006.

"Yields have fallen too low, so we're seeing an adjustment," said Masuhisa Kobayashi, chief JGB strategist at Barclays Capital.

The five-year yield JP5YTN=JBTC inched up 2 basis points to 1.145 percent, while the 20-year yield JP20YTN=JBTC rose 2.5 basis points to 2.030 percent.

The two-year yield JP2YTN=JBTC rose a basis point to 0.795 percent, putting the two-year/10-year spread at 78 basis points, around a four-year low and keeping the yield curve on a flattening bias.

AUCTION DEMAND

The MOF offered 1.7 trillion yen ($14.40 billion) in two-year notes on Friday with a 0.8 percent coupon, the same as in the previous five offers.

Analysts said the auction should go more or less smoothly, but some said demand may be sluggish given that two-year yields were low in light of chances that the Bank of Japan is on course to raise rates, albeit slowly.

"I wouldn't recommend buying given that, at that coupon, the bonds will be worthless after the BOJ raises rates just once," said Kobayashi at Barclays.

The BOJ held rates at 0.5 percent earlier this week after lifting them by 25 basis points to their highest in a decade last month. Many market participants expect the central bank will wait until the latter half of the year before taking rates any higher.

U.S. Treasuries fell on Thursday, erasing the previous day's gains as investors remained concerned about ongoing U.S. inflation risks even after the Fed was seen to have neutralised its stance on rate tightening at a policy meeting that ended on Wednesday.

Perceived chances of a Fed rate cut by the end of June, as shown by U.S. short-term interest rate futures, faded to about 32 percent on Thursday from around 50 percent the previous day. ($1=118.06 Yen)