JGBs futures rise on soft Nikkei

By Shinichi Saoshiro

TOKYO, June 20 (Reuters) - Japanese government bond futures rose on Friday as domestic shares slipped despite gains on Wall Street the previous day, prompting investors to shift funds to safe-haven government debt from equities.

JGBs started the day slightly lower, dragged down by overnight losses in U.S. Treasuries and an initial rise in equities.

They quickly rebounded as the Nikkei share average surrendered earlier gains and slipped into negative territory.

JGBs fell on Thursday with market participants moving in to lock in profits after three straight days of gains. Since the fall was due to profit-taking rather than an attempt to reduce exposure to the bond market, it was easier for bargain-hunters to move in on Friday, said Eiji Dohke, chief fixed-income strategist at UBS Securities.

"JGB prices have swung to both extremes recently, and the market is trying to find a middle ground," he said.

Lead JGB futures plummeted to an 11-month low of 132.05 last Friday on hawkish rhetoric from U.S. and European central bankers, but rallied to a peak of 134.05 just five days later as expectations of aggressive monetary tightening subsided.

Analysts said rating downgrades of monoline insurers and China's surprise fuel price hike were also supporting bonds.

Moody's on Thursday cut the ratings of Ambac Assurance Corp and MBIA Insurance Corp [ID:nN19404809]. The move is expected to lead to renewed credit concerns.

Also on Thursday, China unexpectedly raised retail gasoline and diesel prices by up to 18 percent [ID:nL1914615].

The price hike, which is expected to curb demand in the world's second largest consumer, sent oil prices tumbling [ID:nSIN164224], which in turn cooled expectations of inflation.

BOJ TANKAN EYED

"The fact that JGBs fell yesterday despite seemingly supportive factors shows that the market thoroughly lacks a sense of direction," said Kazuhiko Sano, chief fixed-income strategist at Nikko Citigroup.

September 10-year JGB futures 1JGBv1 was 0.42 point higher at 133.65 after dipping to 133.05. On Thursday, the lead futures contract snapped a three-day winning run on expectations the Bank of Japan will stand pat on interest rates for the rest of the year.

The benchmark 10-year yield fell 4 basis points to 1.750 percent JP10YTN=JBTC after briefly touching 1.795 percent.

Next month's BOJ Tankan, and upcoming policy meetings by the Federal Reserve and the European Central Bank could provide some direction, said Sano at Nikko Citigroup.

Treasuries fell Thursday after a drop in jobless claims and rising factory costs renewed fears the Fed may have to tighten monetary before the end of the year.

The yield on five-year JGBs, exposed to heavy selling on Thursday, slipped 4.5 basis points to 1.350 percent JP5YTN=JBTC.

The Nikkei .N225 was down 0.9 percent in early trade.