JGBs flat as month-end demand offsets stock rally

By Rika Otsuka

TOKYO, Feb 27 (Reuters) - Japanese government bonds were little changed on Wednesday, as month-end demand helped the market recoup early losses due to a rally in Tokyo stocks.

JGBs slid in early trade as share prices rose on relief that a rescue plan is taking shape for ailing U.S. bond insurers, which back billions of dollars of debt.

By midday the Nikkei share average .N225 was up 1.4 percent, rising above the psychologically important 14,000 level for a second day.

But government debt quickly regained its footing as investors picked up longer-dated bonds, trying to extend the duration of their portfolios ahead of the month-end to match benchmark indexes such as the Nomura BPI. An overnight rise in U.S. Treasuries also added support.

"Since Tuesday, investors have been buying bonds to catch up with the extention in the duration of indexes," said Koji Ochiai, a senior market analyst at Mizuho Securities.

Such buying is expected to last for a few more days, putting flattening pressure on the yield curve, Ochiai said.

March 10-year futures edged up 0.01 point to 137.25 2JGBv1, hovering near a two-month low of 136.89.

The benchmark 10-year yield was down 0.5 basis point at 1.470 percent JP10YTN=JBTC after rising as high as 1.490 percent in early trade. The yield struck a two-month peak of 1.500 percent on Tuesday.

Activity was quiet as investors awaited important economic events later in the week, including Japanese data on industrial output and consumer prices, for clues on whether the Bank of Japan could trim interest rates this year.

"The market's main focal point will shift to whether data this week shows as much deterioration in the economy as investor sentiment towards the economy has already worsened," said a senior JGB trader at a European investment bank.

Investors will also be paying attention to comments from BOJ board member Atsushi Mizuho, regarded as a policy hawk, as he is slated speak on Thursday.

The BOJ has left rates unchanged at 0.5 percent for a year, and many market participants expect the BOJ to keep rates on hold for several months and possibly cut them later in the year.

The five-year yield was unchanged on the day at 0.955 percent JP5YTN=JBTC.

The 20-year yield initially climbed to 2.115 percent then fell back to 2.105 percent JP20YTN=JBTC, flat on the day.

U.S. Treasuries rose on Tuesday as U.S. data showed housing prices slid further in the fourth quarter of 2007 and consumer confidence plunged to a five-year low in February.

The poor U.S. data reinforced expectations the Federal Reserve will slash interest rates by a half point next month after having chopped them by 2.25 percentage points since September to stave off a recession. (Editing by Chris Gallagher)