JGBs drop, investors take profits as new FY starts

By Rika Otsuka

TOKYO, April 1 (Reuters) - Japanese government bond futures fell sharply on Tuesday at the start of Japan's new financial year as investors took profits on a rally in the past few months.

A Bank of Japan survey showed on Tuesday that business sentiment fell to a four-year low in the first quarter, providing further evidence of a worsening economic outlook and reinforcing market speculation that the central bank may cut interest rates later in the year.

The headline index for big manufacturers' sentiment was plus 11, compared with a reading of plus 19 in the previous survey in December and below the market's median forecast of plus 13. [JPBCLG=ECI]

"Investors locked in profits after they confirmed that the tankan survey was weak as expected," said Atsushi Ito, JGB strategist at Morgan Stanley.

But bond selling was not seen lasting for long, and JGB yields are likely to fall in the medium-term, Ito said.

June 10-year JGB futures dropped 0.40 point to 140.12 2JGBv1 after sliding as low as 139.83.

The current benchmark 290th 10-year JGB yield rose 3.5 basis point to 1.310 percent <JP10YTN=JBTC>, moving away from a three-year low of 1.215 percent struck last week.

After the tankan survey, the market's focus switched to the results of a Ministry of Finance 10-year debt sale on Tuesday. The 1.9 trillion yen ($19 billion) auction is the first major JGB sale of the new financial year and is seen as an important barometer of demand for yield among domestic investors.