JGB futures hit 4-mth high buoyed by weaker Nikkei

By Masayuki Kitano

TOKYO, Aug 7 (Reuters) - Japanese government bond futures climbed to a four-month high on Thursday as worries about the domestic economy's outlook and a fall in Tokyo share prices lured investors toward safe haven debt.

Bond yields fell broadly, with the five-year yield hitting a four-month low and the two-year yield dipping to its lowest in three months, due to short-covering and investor demand.

JGBs have rallied over the past couple of weeks as data pointed toward a downturn in Japan's economy, prompting investors to scale back expectations for a Bank of Japan rate rise in the financial year to next March.

"There are not many sellers and there's a lot of interest in buying bonds on dips, especially in the medium-term sector," said a dealer for a Japanese brokerage house.

JGBs also gained a lift because Tokyo share prices fell, with the Nikkei average .N225 down around 1 percent, despite a rise in U.S. share prices and the yen's fall to a seven-month low against the dollar on Wednesday, market players said.

September 10-year JGB futures rose 0.17 point to 137.36 2JGBv1, having pared some gains after climbing to a four-month high of 137.46 earlier.

The 10-year JGB yield fell 1 basis point to 1.510 percent JP10YTN=JBTC, edging back towards a four-month low of 1.495 percent hit on Monday.

Yields on medium-term bonds fell the most, with the five-year yield dropping 3.5 basis points to a four-month low of 1.020 percent JP5YTN=JBTC.

Two-year yields, the sector of the JGB yield curve that is most sensitive to shifts in the monetary policy outlook, fell 1.5 basis point to a three-month low of 0.720 percent JP2YTN=JBTC.

"The bond market's sentiment is strong," said Naomi Hasegawa, senior fixed-income strategist for Mitsubishi UFJ Securities.

Data showing that core private-sector machinery orders, a key gauge of corporate capital spending, fell by a smaller-than-expected 2.6 percent in June, did little to allay concerns about the economy's weakness.

The rise in JGBs picked up steam on Wednesday, when bond yields fell broadly due to investor buying of cash bonds and some active receiving of interest rate swaps, especially in the eight-year to 10-year sector.