JGB futures dip on Treasuries, MOF auction in focus

By Rika Otsuka

TOKYO, April 3 (Reuters) - Japanese government bond futures dipped on Thursday, hurt by an overnight fall in U.S. Treasuries on expectations an end to the Federal Reserve's campaign of cutting interest rates may be in sight.

Activity was subdued, however, as investors were cautious before results of the Ministry of Finance's auction of 500 billion yen ($4.9 billion) in 10-year inflation-linked bonds, due later in the day.

The debt sale was in focus as the MOF's benchmark 10-year JGB auction on Tuesday met with poor demand, raising worries about investors' appetite for government debt in the new business year, which started on the same day.

"The market will look to today's auction for clues on whether demand is improving for CPI-linkers, which investors dumped at the end of the last business year," said a trader at a European brokerage.

"Weak results will hurt sentiment and may spark bond selling."

As the global credit crunch worsened in the past few months, the CPI-linked JGB market has been battered by heavy selling from overseas investors, who hold the bulk of the bonds.

June futures edged down 0.10 point to 139.45 2JGBv1.

The benchmark 10-year yield was unchanged at 1.375 percent JP10YTN=JBTC, holding near a one-month high of 1.380 percent hit on Wednesday.

The five-year yield was up 0.5 basis point at 0.830 percent JP5YTN=JBTC.

Super-long bonds, with maturities of more than 10 years, outperformed the rest of the market on a pick-up in buying by long-term investors such as life insurers and pension funds.

Yields on 20- and 30-year papers fell 2 basis points each to 2.105 percent JP20YTN=JBTC and 2.410 percent JP30YTN=JBTC, respectively. The yield curve flattened as a result.

Asahi Mutual, one of Japan's largest life insurers that manages 6 trillion yen ($58.6 billion) of assets, told Reuters on Wednesday that it plans to buy a net 40 billion yen of JGBs in the current business year, most likely in 20-year bonds. [nT87899]

U.S. Treasuries ended lower on Wednesday after Fed Chairman Ben Bernanke told Congress's Joint Economic Committee that the world's biggest economy would barely grow in the first half of 2008 but monetary policy and fiscal policies already in place should help support a return to growth later this year.

Bernanke's comments suggested to many in the market that the United States may be late in the rate-cutting cycle, prompting investors to trim their Treasury holdings. ($1=102.31 yen) (Editing by Brent Kininmont)