JGB futures dip on stocks, tepid investor demand

By Satomi Noguchi

TOKYO, April 7 (Reuters) - Japanese government bond futures dipped on Monday, erasing earlier gains as stocks rebounded, while tepid institutional demand disappointed dealers who had expected solid buying at the start of Japan's fiscal year.

JGB futures rose earlier, following gains in U.S. Treasuries late last week after the biggest monthly job loss in five years cemented the notion that the faltering U.S. economy is on the brink of a recession.

"With a risky factor such as the U.S. jobs report out of the way, we were expecting that institutional investors would move more actively to buy the bonds," said a bond trading manager at a Japanese bank.

"But market prices did not show such demand was coming."

Some analysts said gains in JGBs were capped by lingering optimism that the worst of the credit crisis is over and caution ahead of a Group of Seven meeting this weekend.

June 10-year futures fell 0.10 point to 139.55 2JGBv1, after climbing as high as 139.95 earlier.

The benchmark 10-year JGB yield slipped a basis point to 1.320 percent JP10YTN=JBTC but was off an earlier low of 1.300 percent.

The 10-year yield had jumped to a one-month high of 1.380 percent last week in volatile trade as domestic investors such as banks sold aggressively to lock in profits at the start of a new fiscal year in Japan.

That jump in yield came after sharp gains in JGBs in March amid growing worries that the widening credit crisis and a downturn in the U.S. economy will hurt Japan and could prompt the Bank of Japan to cut interest rates later this year.

The five-year yield JP5YTN=JBTC was flat at 0.805 percent while the two-year yield JP2YTN=JBTC slipped half a basis point to 0.555 percent.

The BOJ is widely seen holding rates at 0.5 percent at its two-day policy meeting starting on Tuesday.

The 20-year yield JP20YTN=JBTC dipped a basis point to 2.050 percent as demand from life insurers was supporting prices of superlong-dated bonds, traders said.

The Nikkei share average .N225 was up 0.4 percent at the end of morning trade.

Japan's government is seen likely to nominate BOJ acting governor Masaaki Shirakawa on Monday to take the helm of the central bank for a full term, after the main opposition Democratic Party signalled support for the idea.

But resistance by Democrats' leader Ichiro Ozawa to a government plan to nominate a former finance ministry bureaucrat as deputy governor has prompted speculation that Prime Minister Yasuo Fukuda may postpone submission of one or both nominees.[ID:nT221324] (Editing by Michael Watson)