JGBs rise on Treasuries as US growth seen slowing

By Chikako Mogi

TOKYO, Nov 30 (Reuters) - Japanese government bonds rose on Friday after Treasuries rallied overnight on expectations that more strains in the banking sector and weak economic data will prompt a hefty interest rate cut by the Federal Reserve.

Fed Chairman Ben Bernanke said in a speech late on Thursday that a resurgence in financial strains in recent weeks had dimmed the outlook for the U.S. economy, signalling an openness to lower interest rates.

Data showing higher weekly jobless claims and weaker-than-expected new home sales painted a bleaker picture for the economy, fuelling expectations that the Fed may cut rates by 50 basis points rather than just 25 at its Dec. 11 meeting.

"The JGB market is following the rally in the Treasury market as the focus is shifting from global credit problems to damage to economic fundamentals," said Kenro Kawano, an interest rate strategist at Credit Suisse.

Persistent rumours of further write-downs by financial firms due to the credit crisis triggered by problems in the subprime mortgage sector underpinned the U.S. Treasury market, ahead of the biggest investment banks' financial year-end at the end of November.

Credit jitters drove one-month euro and dollar LIBOR covering the year-end period soaring on Thursday, also putting upward pressure on yen LIBOR, but Japan's overnight call rates were stable. Traders said pressure from foreign banks was not building in the domestic overnight call market.

December 10-year futures 2JGBv1 rose 0.08 point to 137.04, inching closer to a 22-month high of 137.53 hit last week.

The 10-year yield JP10YTN=JBTC fell 1.5 basis points to 1.470 percent, still above a 26-month low of 1.395 percent hit last week.

The two-year yield JP10YTN=JBTC inched down 0.5 basis point to 0.765 percent while the five-year yield JP5YTN=JBTC eased 1 basis point to 1.030 percent.

BOJ HANDS TIED

A more than 1 percent rise in Japanese stocks helped trim some of the early JGB gains, traders said. The benchmark Nikkei stock average .N225 ended the morning up 1.2 percent.

With all eyes on the state of the U.S. economy, the market showed little reaction to Japanese data on Friday as it alone will not determine the course of the Bank of Japan's monetary policy, analysts said.

Japan's core consumer prices rose 0.1 percent in October from a year earlier, the first rise in 10 months and above a forecast for a flat reading, while both the jobless rate and household spending in October matched expectations.

"Market reaction to solid Japanese data has been muted due to views the BOJ can't raise rates because of overseas factors," said Tatsuo Ichikawa, fixed-income strategist at ABN AMRO.

"The spike in euro and dollar LIBOR reflects a fragile global financial system, making it difficult to push up yields."

Japanese overnight call rates were around 0.53 percent TANSHI, above the BOJ's 0.5 percent policy target, due to month-end funding demand. Traders said funding pressure was likely to abate later in the session.

One-month yen LIBOR rose to 1 percent JPYLIBOR on Thursday, up from around 0.65 percent the day before, following a 15 basis point increase in one-month TIBOR ZTIBOR.

"TIBOR is staying high simply because of the year-end demand as Japanese holidays for the year-end are a bit longer than usual this year, making investors more cautious about funding," said a money market dealer at a Japanese trust bank. (Editing by Mike Miller)