JGBs slide as US bank earnings reassure investors

By Eric Burroughs

TOKYO, April 21 (Reuters) - Japanese government bonds fell on Monday, pushing benchmark yields to a seven-week high, as a slew of U.S. bank earnings last week reassured investors that the worst of the credit crisis may have passed. A jump in Wall Street after the array of quarterly results boosted Tokyo shares, pushing the Nikkei stock average .N225 up as much as 2 percent to a seven-week high and spurring selling of safe-haven government debt.

As financial markets show signs of calming from the turmoil that erupted last August, investors now see little chance of the Bank of Japan cutting rates from 0.5 percent and are starting to brace for a potential rate hike next year.

Swap contracts on the overnight call rate <JPONIBOJ=TRDT> are now showing a nearly 20 percent chance of a quarter-point rate hike by next April after having priced in a 50-60 percent chance of a rate cut by the end of the year earlier in the month.

But analysts said that the market would be slow to embrace the prospect of higher rates just yet, given the severity of the crisis stemming from defaults on U.S. mortgages.

"As the market is unlikely to start aggressively factoring in rate hikes, however, we do not expect upward pressure on front-end yields to accelerate any time soon," said JGB strategists at Barclays Capital in a note to clients. June 10-year futures 2JGBv1 dropped 0.15 point to 138.45 and struck a seven-week low of 138.26.

The benchmark 10-year yield <JP10YTN=JBTC> rose 2 basis points to a seven-week high of 1.415 percent.

Investors are expected to be eager to buy 10-year paper at yields above 1.40 percent, likely limiting any rise and putting pressure on the yield curve to flatten, analysts said.

Institutional investors such as life insurers have also been steady buyers of longer-dated bonds, especially since a solid auction of 30-year JGBs last week.