JGB futures edge down on concern over Treasuries

By Rika Otsuka

TOKYO, Jan 31 (Reuters) - Japanese government bond futures slipped on Wednesday on jitters over rising Treasury yields, with investors eyeing economic events for clues to the future direction of U.S. interest rates.

Trade was quiet as market participants awaited key U.S. data, such as the advance estimate of October-December growth, and a statement from the U.S. Federal Reserve's two-day policy meeting ending later in the day, traders said.

The Fed is widely expected to leave the funds rate at 5.25 percent at this week's meeting.

Japanese investors were wary that a further rise in U.S. Treasury yields from five-month highs could prompt investors to cut back their holdings of JGBs.

"JGBs will be impacted if U.S. interest rates rise further, with the benchmark U.S. 10-year yield trying 5 percent," said Chotaro Morita, chief JGB strategist at Deutsche Securities.

Rising government debt yields in Europe also kept Japanese investors nervous as the 10-year Bund yield on Tuesday touched its highest since early July.

JGB prices were underpinned, however, as some soft domestic data in the past week has reinforced doubts about a Bank of Japan rate rise in February, traders said.

Government data showed on Wednesday that Japanese wage earners' total cash earnings slid 0.6 percent in December from a year earlier, signalling that companies are slow in passing on their strong earnings to households.

"The drop was rather steep. The data was certainly not a supportive factor for a February rate hike," said Masuhisa Kobayashi, chief JGB strategist at Barclays Capital.

The consumption-related data came a day after other data showed that overall household spending fell more than expected in December from a year earlier.

After leaving the overnight call rate unchanged at 0.25 percent on Jan. 18, the BOJ said it needed to examine more data and remained concerned about very moderate price rises and weak consumption.

March 10-year futures edged down 0.08 point to 134.33 2JGBv1. The lead contract had hit a one-month high of 134.96 on Friday after Japan's consumer price index came in softer than expected, stirring doubts about whether the BOJ would raise interest rates at its Feb. 20-21 meeting.

The 10-year yield was at 1.705 percent JP10YTN=JBTC, unchanged on the day.

CURVE FLATTENS

The yield on the new 253rd two-year note was up 0.5 basis point to 0.740 percent JP2YTN=JBTC, staying above a 3-1/2-month low of 0.705 percent hit last week.

Fading expectations for a near-term rate rise have caused short-term yields to fall.

At the same time, investors have forced to unwind curve-flattening trade, pushing up 20 and 30-year yields to three-month peaks.

But super-long bonds, whose maturities are longer than 10-years, drew some buying on Wednesday as investors felt their yields have risen to levels where they can start buying.

Yields on the 20- and 30-year papers dipped a basis point each to 2.165 percent JP20YTN=JBTC and 2.425 percent JP30YTN=JBTC, respectively.

Scope for further steepening of the curve is likely be limited as market players no longer hold an excess amount of yield-flattening positions, analysts said. But any spikes in U.S. Treasury yields could push Japanese long-term yields, making the curve steepen again, they added.