JGB futures hit 10-mth low after US data reassures

By Eric Burroughs

TOKYO, May 29 (Reuters) - Japanese government bond futures tumbled to a 10-month low on Thursday after U.S. capital spending data the previous day provided some reassurance on the economy's health and knocked Treasuries lower.

The U.S. durable goods data showing orders dropping less than expected in April and some measures of capital spending posting an increase convinced more investors the Federal Reserve may lift interest rates later in the year.

The figures pushed the 10-year Treasury yield above 4 percent for the first time in five months. [US/]

"With 10-year U.S. yields breaking the 4 percent threshold last night, we expect an increasingly cautious outlook in the JGB market as well," said JGB strategists at Barclays Capital in a note to clients.

Dallas Fed President Richard Fisher, one of the more hawkish policymakers at the central bank, drove home the message of higher rates by saying late on Wednesday that hikes could come sooner rather than later if inflation worsens, even if the economy is weak. [ID:nN28352973]

JGBs have been battered over the last two months as many market players, especially big Japanese banks, have rushed to dump safe-haven debt holdings they had built up during the worst stretch of the credit crisis earlier in the year.

With the market eyeing the possibility of a Bank of Japan rate increase over the next year, dealers are also preparing for an auction of two-year paper later in the day.

The Ministry of Finance will sell 1.7 trillion yen of two-year JGBs with a coupon of 0.9 percent, the highest since the issue sold in October last year.

Demand is expected to be decent given the higher coupon and expectations that any BOJ rate hike will be months away.

June 10-year futures 2JGBv1 fell 0.63 point to 134.03 and struck a 10-month low of 133.88.

The benchmark 10-year yield JP10YTN=JBTC jumped 5 basis points to 1.785 percent and hit a 10-month peak of 1.795 percent.

Japanese investors have not been the only ones dumping JGBs. MOF data on Thursday showed foreign investors shed 492.9 billion yen ($4.7 billion) of Japanese bonds in the week ending on May 24, taking their total selling over five weeks to 2.02 trillion yen. [JP/CAP]

The two-year yield JP2YTN=JBTC rose 3 basis points to 0.880 percent and reached a seven-month peak of 0.885 percent at one point.

The lead euroyen futures contract switched over to March 2009 from December 2008. The lead contract JEYv1 dipped 2.5 basis points to 98.900, pricing in a 1.10 percent three-month TIBOR rate ZTIBOR by then versus the current 0.841 percent.

The market shrugged off domestic economic figures showing retail sales rose a tepid 0.1 percent in April from a year earlier, with economists saying the report showed that steep energy and food costs are pinching consumers. [ID:nT170862] ($1=104.66 yen)

(Editing by Brent Kininmont)