JGBs dip as stocks gain, Treasuries slip

By Rika Otsuka

TOKYO, Oct 26 (Reuters) - Japanese government bonds dipped on Friday as investors took cues from a rise in share prices and an overnight fall in U.S. Treasuries, while data shed little light on the timing of the Bank of Japan's next interest rate rise.

Japan's nationwide core consumer price index fell 0.1 percent in September from a year earlier, government data showed on Friday, marking the eighth straight month of annual decline and matching the market's consensus forecast.

Industrial production fell 1.4 percent in September from the previous month, compared with forecasts for a 1.3 percent drop, a separate report showed.

Both indicators reinforced the widely held view the BOJ will keep interest rates on hold for a while.

But investors found it difficult to trade on those figures as they did not give a clear picture about when the next BOJ rate rise will take place, said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities.

"Market players sold JGBs in reaction to higher share prices and weaker Treasuries," Hasegawa said. "Data on CPI and output did not have a large impact on the bond market."

After the latest CPI and output data, swap contracts on the overnight call rate JPONIBOJ=TRDT are pricing in less than a 20 percent chance of a BOJ rate rise by the end of this year, little changed from before the data.

December JGB 10-year futures slid 0.09 point to 136.10 2JGBv1, pulling away from a one-month high of 136.26 reached during the previous day's regular session. Futures had risen as high as 136.27 in Wednesday's evening session.

The benchmark 10-year yield edged up 0.5 basis point to 1.585 percent JP10YTN=JBTC, hovering near a one-month low of 1.555 percent struck earlier this week.

JGB prices have rallied in the past few weeks as lingering uncertainty over the outlook for global economic and market conditions has prompted investors to doubt the possibility of a BOJ interest rate rise this year.

Yields on two-year notes JP2YTN=JBTC and five-year bonds JP5YTN=JBTC rose 1.5 basis points each to 0.780 percent and 1.085 percent, respectively.

The 20-year yield JP20YTN=JBTC climbed 0.5 basis point to 2.160 percent.

The Nikkei share average .N225 finished the morning session up 0.61 percent at 16,383.88.

Treasuries slipped on Thursday as U.S. stocks pared losses after a report quelled rumours that insurance giant American International Group would post a big investment write-down.

BOJ, FED IN FOCUS

The market's attention has shifted to policy meetings by Japanese and U.S. central banks next week as high-profile CPI data got out of the way.

The BOJ is widely seen keeping the overnight call rate at the current 0.5 percent at its policy meeting on Wednesday.

Investors will focus on the BOJ's twice-yearly outlook report on the economy and prices released after a policy meeting and comments from Governor Toshihiko Fukui at a news conference afterwards, watching whether the central bank will continue to show a forward-looking stance towards a rate rise.

The market is also likely to take its cue from the Federal Reserve's Oct. 30-31 meeting, at which the U.S. central bank is expected to lower interest rates again following a hefty half-percentage-point rate cut in September.

"Many investors are doubting about the possibility of JGB yields falling further, given the fact that the BOJ is not expected to cut interest rates," said Mari Iwashita, senior market economist at Daiwa Securities SMBC.

"At the same time, they cannot stop worried about the U.S. economy," said Iwashita, adding that the short-term direction in the JGB market is more likely to set by U.S. factors.