JGBs jump as BOJ seen mulling interest-rate cut
* JGB futures jump as BOJ seen considering a rate cut
* Euroyen futures hit 8-month high
* Two-year yield slides to a 6-month low
* Swap contracts now show 50 pct of BOJ cut on Friday
TOKYO, Oct 29 (Reuters) - Japanese government bonds jumped on Wednesday after it emerged that the Bank of Japan would consider cutting interest rates at its policy meeting on Friday. [ID:nTKF003120] [ID:nTKF003120]
December JGB futures rose nearly a full point as investors bought bonds, which have been hurt by selling from Japanese banks and pension funds to offset losses in their portfolios caused by plunges in Tokyo shares.
Short-term notes -- the most sensitive sectors to a shift in expectations for BOJ monetary policy -- soared, with the two-year yield falling 14 basis points at one stage to 0.560 percent JP2YTN=JBTC, the lowest since since April.
"Japanese big banks bought the midterm sector after the BOJ rate cut reports," said a trader at Japanese bank.
"But some people are already moving to take profits because an actual BOJ rate cut is still uncertain," the trader added.
Reports on a possible BOJ rate cut this week surprised many market players who had speculated such monetary policy action would only be taken as a last resort after introducing more liquidity-enhancing measures, because of its already low interest rates.
But mounting expectations for a Federal Reserve interest rate cut later in the day and European Central Bank monetary easing next week fuelled talk that the BOJ may also move to cut rates in a coordinated effort to bolster investor confidence in financial markets and the global economy.
Swap contracts on the overnight call rate showed that investors now see about a 50 percent chance of the BOJ cutting interest rates to 0.25 percent from 0.50 percent at its meeting on Friday, an abrupt shift from almost no expectations at the start of the week.
"Given the rise in U.S. stocks, the reactions in the currency market and the Nikkei's surge, the BOJ may now be cornered into cutting rates so that it does not disappoint the market," said Akihiko Yokoyama, a fixed-income strategist at JPMorgan Securities.
The March euroyen contract JEYv1 rose as high as 99.430, the highest since February, before retreating to 99.400, up 6 basis points on the day.
The lead JGB futures 2JGBv1 contract climbed 0.77 point to 138.02, after jumping as much as 0.90 point to 138.15.
The five-year yield tumbled 12.5 basis points to 0.905 percent JP5YTN=JBTC after sliding as low as 0.895 percent on buying from a big Japanese bank, traders said.
The benchmark 10-year yield dropped 2.5 basis points to 1.495 percent JP10YTN=JBTC after falling as low as 1.475 percent.
Traders said falls in longer-dated bond yields are limited on the 6 percent surge in the Nikkei share average .N225 and the yen's broad fall, analysts said.
By some measures, JGBs may have a tough time attracting longer-term investors. The Nikkei sell-off to a 26-year low has driven its dividend yield to near 3 percent, double the 10-year bond yield and meaning stocks could be seen as very cheap versus JGBs. (Editing by Chris Gallagher)
