JGB futures fall on Treasuries, 5-year auction eyed
* Futures fall after slide in Treasuries
* Caution before 5-year JGB auction
* Auction seen as test of demand after bleak BOJ econ view
TOKYO, Aug 20 (Reuters) - Japanese government bond futures fell on Wednesday dented by losses in U.S. Treasuries, while many investors cautiously awaited the outcome of a five-year JGB sale.
The auction comes a day after the Bank of Japan cut its economic assessment for the second month in a row, although the central bank reiterated its view that the economy would eventually return to moderate growth. [nT269934]
That cemented expectations that the BOJ will keep interest rates steady in the coming months, defusing nascent speculation that it may be forced to cut interest rates by early next year.
Given little scope for a BOJ rate cut, the 1.9 trillion yen ($17.3 billion) five-year note auction will be a litmus test of investor appetite for JGBs with low yields, analysts said.
The coupon is expected to drop to 1.0 percent, the lowest since the issue sold in April and well down from 1.3 percent at the previous auction of the maturity last month.
"If the auction goes smoothly, the chance of the benchmark 10-year yield breaking below 1.4 percent will increase," Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities, said in a note to clients.
September futures dropped 0.12 point to 137.84 2JGBv1, pulling back from a four-month high of 138.12 reached last week.
The benchmark 10-year yield rose 1 basis point to 1.440 percent JP10YTN=JBTC, above a four-month low of 1.415 percent hit last week.
The five-year yield was up 1 basis point at 1.015 percent JP5YTN=JBTC.
JGBs have gained on concern that a global economic slump sparked by the U.S. credit crisis may be spreading too quickly for Japan to avoid a recession, underscoring the view that the BOJ will hold interest rates unchanged for a while.
The five-year yield had fallen as much as 24 basis points since late July to hit a four-month low of 0.980 percent last week. Longer-dated Treasuries fell on Tuesday after government reports said U.S. producer prices jumped at the fastest year-over-year rate in 27 years in July, while a slide in Wall Street kept short-dated bonds popular with investors seeking protection from equity losses. [US/]
The inflation rise was negative for bonds because inflation erodes the value of fixed-income securities. (Editing by Hugh Lawson)
