JGBs edge up with Treasuries, await Shirakawa

By Eric Burroughs

TOKYO, May 20 (Reuters) - Japanese government bond futures edged up on Tuesday, getting a boost from gains in U.S. Treasuries and as more market players trimmed short positions built up during the slide to seven-month lows last week.

Investors are awaiting what Bank of Japan Governor Masaaki Shirakawa will say on the policy outlook later in the day after the central bank wraps up a two-day meeting. [ID:nT305710]

The BOJ is widely expected to keep rates at 0.5 percent, but swap contracts on the overnight call rate JPONIBOJ=TRDT are showing a 60 percent chance of a rate hike by the end of the year and are fully pricing in such a move by next April.

Data on Tuesday showed Japan's tertiary index of service sector activity rose 3 percent in March from the previous month, half the expected increase after a sharp 1.6 percent drop in February.

The report suggested the economy is muddling along and being underpinned primarily by exports, as seen in last week's surprisingly strong figures on first-quarter growth. The Reuters Tankan for May showed sentiment among major manufacturers turning negative for the first time in five years. [JP/TAN1]

"Market participants have yet to form a consensus on the near-term market range," said JGB strategists at Barclays Capital in a note to clients.

"Although many believe long-term yields are too high relative to the current state of the economy and level of share prices, there is still no agreement on how strong the economic momentum will be going forward," they said.

June 10-year futures 2JGBv1 rose 0.23 point to 135.35, holding off the seven-month low of 134.28 struck last week.

JGB futures remain prone to sharp moves as two months of severe volatility has burned many market players, from big Japanese banks to foreign hedge funds, prompting them to pull back from trading until activity settles down.

The benchmark 10-year yield JP10YTN=JBTC dipped a basis point to 1.660 percent, while the five-year yield JP5YTN=JBTC fell 2 basis points to 1.225 percent.

The two-year yield JP2YTN=JBTC edged down half a basis point to 0.820 percent as the yield curve flattened slightly. The JGB gains came as the Nikkei share average .N225 dipped 0.2 percent and held below a four-month peak struck last week. Global equity markets have rebounded on building confidence the worst of the nine-month credit crisis has passed. (Editing by Brent Kininmont)