JGBs rise on Nikkei, Treasuries as eyes turn to BOJ

By Naomi Tajitsu

TOKYO, Feb 16 (Reuters) - Japanese government bonds rose on Friday due to a slip in domestic share prices and rising U.S. Treasuries, which helped pull the lead futures contract away from a one-month low hit in the previous session.

JGB gains were capped as investors were cautious about aggressively buying bonds in the aftermath of strong economic growth data on Thursday that kept alive speculation that the Bank of Japan could raise rates at its policy meeting next week.

"The market has tilted a bit in favour of a rate rise scenario, but still the uncertainty (surrounding the BOJ's rate outlook) hasn't changed," said Tatsuo Ichikawa, a JGB analyst at ABN AMRO Securities.

March futures 2JGBv1 ended the morning session up 0.28 point at the day's high 134.16, recovering from a fall to 133.80 on Thursday, its lowest level since mid-January.

The yield on the benchmark 10-year JGB JP10YTN=JBTC slipped two basis points to 1.720 percent, thanks to a 0.29 percent fall in the Nikkei share average .N225.

The two-year yield JP2YT=JBTC was down half a basis point at 0.780 percent. Earlier in the session, the yield matched a one-month high of 0.795 percent previously hit on Thursday.

JGBs also tracked gains in U.S. Treasuries, which rallied on Thursday after a benign inflation assessment by Federal Reserve Chairman Ben Bernanke and weak industrial production data raised speculation that the U.S. central bank may cut rates this year.

BOJ IN FOCUS

Analysts said that given an abrupt, last-minute turnaround in the market's view that the BOJ would raise rates last month that had triggered a climb in JGB prices, dealers were hesitant to sell bonds aggressively ahead of the BOJ's Feb. 20-21 meeting.

But they said the market's gains would likely be limited before the gathering due to the possibility that the central bank could raise rates to 0.5 percent.

Market participants anticipating a rate rise next week were vindicated by data on Thursday that showed GDP rose 1.2 percent in October-December from the previous quarter, well above forecasts for a 0.9 percent rise.

A Reuters poll taken after the figures showed that 24 out of 49 traders and analysts in Tokyo's foreign exchange and bond markets expect the BOJ to raise rates next week, indicating a clean split in market views on the central bank's rate outlook.

Swap contracts on the overnight call rate JPONI=TRDT on Friday showed a roughly 55 percent chance of a rate rise next week, up from around 30-40 percent over the past few weeks.

Analysts said the 10-year JGB yield has largely been stuck between 1.6 and 1.8 percent since late August, and the yield would probably stay there even if the BOJ raised rates soon.

"It will be difficult for JGBs to break out of their range even if rates rise next week or next month," said Ichikawa at ABN.