JGBs rise on reports on Fed outlook, auction eyed

By Shinichi Saoshiro

TOKYO, June 17 (Reuters) - Japanese government bond futures rose on Tuesday after media reports that the Federal Reserve may not boost interest rates as aggressively as financial markets have been expecting prompted investors to buy back government debt.

The Financial Times said in its online edition on Tuesday that market expectations for the Fed to raise interest rates three or four times by the end of the year do not seem to match the balance of views within the U.S. central bank. [ID:nT75433]

The Wall Street Journal also said on Tuesday that the Fed does not at present appear to see a compelling case for raising rates before the autumn unless the inflation outlook deteriorates considerably.

Overall activity was subdued as many market players took a wait-and-see stance due to the Ministry of Finance's 20-year JGB auction on Tuesday.

"Those who were selling to hedge against the 20-year auction in early trade were forced to cover short positions on the newspaper reports," said a senior trader at a European brokerage.

September 10-year futures climbed 0.38 point to 132.86 2JGBv1.

Futures gained on Monday, rising from an 11-month low of 132.05 as remarks by Bank of Japan Governor Masaaki Shirakawa late last week allayed speculation the central bank will lift interest rates this year to rein in inflation.

The BOJ chief's remarks provided a reprieve to the short- and mid-term sectors -- which are more sensitive to changes in monetary policy outlook -- and on Monday pushed down their yields from multimonth peaks hit last week.

The benchmark 10-year yield fell 1.5 basis points to 1.860 percent JP10YTN=JBTC.

The two-year yield slid 3.5 basis points to 0.925 percent JP2YTN=JBTC, while the five-year yield dropped 4.5 basis points to 1.450 percent JP5YTN=JBTC.

The Ministry of Finance is offering 800 billion yen ($7.4 billion) of 20-year JGBs. The coupon of 2.4 percent is the same as the previous month's issue, which had the highest coupon since the July 2004 issue.

The 20-year auction is seen as an opportunity for the market to gauge investor demand. JGBs were roiled last week by surprisingly direct anti-inflation rhetoric from central bankers in Europe and the United States that were seen as opening the way for a potential BOJ rate rise later this year.

Traders and analysts expect the 20-year auction to lure solid demand from investors such as life insurers and pension funds due to the higher yields in longer-dated JGBs.

The 20-year yield edged down 0.5 basis point to 2.395 percent JP20YTN=JBTC. ($1=108.19 Yen) (Additional reporting by Rika Otsuka; Editing by Michael Watson)