JGB futures fall on stocks rebound, BOJ move eyed

By Tetsushi Kajimoto

TOKYO, May 31 (Reuters) - Japanese government bond futures slipped back towards a nine-month low on Thursday as the Tokyo stock market rebounded, tracking gains on Wall Street after global markets shrugged off the previous day's sell-off in China.

Short-term bonds remained under pressure as investors have grown wary about a rate hike by the Bank of Japan in the coming months, sending two-year yields to a 10-year high.

"There seemed little impact from yesterday's fall in China's stock market, and a rebound in Nikkei led to some selling," said Satoshi Yamada, a fixed-income strategist at Nikko Citigroup.

"But the trend of a yield curve flattening will likely persist as investors seem to be buying long-term bonds on dips and selling short-term JGBs to brace for a BOJ move," he said.

Longer-term bonds were also supported by demand from domestic investors buying to match changes in benchmark performance indexes at the end of the month.

In the absence of major economic indicators, traders will be looking closely at what BOJ board member Kiyohiko Nishimura has to say about the economy and prices when he speaks to business leaders and holds a news conference later in the day.

"You cannot bet on there being no rate hike in July," said Masuhisa Kobayashi, chief JGB strategist at Barclays Capital.

"As to whether Nishimura may say anything cautious or bullish, I will be looking more closely at his news conference when he will likely speak more feely."

The two-year JGB yield rose 1.0 basis point to 0.980 percent JP2YTN=JBTC, exceeding a 10-year high of 0.975 percent hit on Wednesday.

June 10-year JGB futures fell 0.14 point on the day to 133.08 2JGBv1, having hit a nine-month low of 133.04 on Wednesday.

The benchmark 10-year yield rose 1.5 basis points to 1.750 percent, after rising as high as 1.755 percent on Tuesday.

The five-year yield edged up 1.0 basis point to 1.345 percent JP5YTN=JBTC, after hitting a nine-month high of 1.350 percent on Wednesday.

JGB yields rose sharply earlier in the week, triggered by higher overseas government bond yields on prospects of more monetary tightening and upbeat comments by BOJ board members.

JGBs took a beating on Tuesday as surprisingly upbeat figures on jobs and household spending reinforced expectations of a BOJ credit tightening in the coming months.

Market players will also be keeping a close eye on other upcoming data, including U.S. jobs figures due on Friday.