JGB futures fall as buying incentives dry up

By Shinichi Saoshiro

TOKYO, June 19 (Reuters) - Japanese government bond futures fell on Thursday, giving up an early advance as market-moving incentives dried up after three consecutive days of gains.

JGBs had started the day higher, lifted by overnight gains in U.S. Treasuries and a tumble in equities.

But the market got bogged down as profit-takers gained the upper hand in subdued trading.

JGBs have enjoyed a bullish week as interest rate hike expectations in the United States and Europe have been curbed, while the view that the Bank of Japan won't boost rates later this year triggered a wave of bond buying.

BOJ Governor Masaaki Shirakawa said late last week that Japanese economic and price conditions were different from those in the United States and Europe, stressing that each nation should decide on monetary policy based on its own conditions.

"JGBs surged all week after BOJ Governor Shirakawa's comments last Friday," said Hiroyoshi Sandaya, fixed-income strategist at Goldman Sachs. "But the bond market now needs fresh incentives, such as soft economic data and factors which decidedly erode the likelihood of a BOJ rate hike."

Lead 10-year September JGB futures were down 0.27 on the day at 133.37 after having climbed to 133.97 2JGBv1 in the morning.

The benchmark 10-year yield was flat at 1.775 percent after dipping to 1.750 percent JP10YTN=JBTC.

DAMP BUSINESS SENTIMENT

Investors waiting to gauge domestic business sentiment in the BOJ's June tankan survey due out on July 1, received a possible taste of what is to come from the Reuters Tankan on Thursday.

Reuters' survey of leading Japanese manufacturers, which tracks the central bank's influential tankan survey, showed business sentiment in June matched the five-year low set in May. [ID:nT141123]

The weak reading suggests the BOJ's June tankan may show a worsening of business sentiment from three months earlier, heightening the view that the central bank will keep rates on hold at least until early next year.

"The fall in the manufacturers' index was particularly big and confirmed our view that the BOJ's Tankan will turn out weak," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

"The BOJ is taking a neutral stance on monetary policy for now, but I think it's focusing somewhat more on downside economic risks. It's quite unlikely the bank will raise interest rates," he said.

The five-year yield JP5YTN=JBTC rose 0.5 basis point to 1.350 percent.

The two-year yield was unchanged at 0.870 percent JP2YTN=JBTC.

The short- and mid-term sectors, more sensitive to shifting perceptions in monetary policy, enjoyed firm support from financial institutions during this week's market surge.

But a lull ensued with investors taking to the sidelines after the sharp plunge in yields, traders said.

The Nikkei share average .N225 fell 1.8 percent, weighed down by a firmer yen and an overnight fall on Wall Street. [.T] (Editing by Hugh Lawson)