JGBs climb on Nikkei, 10-yr yield hits six-week low

* JGBs climb on sliding stocks, gains in Treasuries

* Benchmark yield touches six-week low of 1.590 percent

* Decade-high nationwide CPI seen as negative for growth

* BOJ expected to sit tight on rates

By Shinichi Saoshiro

TOKYO, June 27 (Reuters) - Japanese government bonds climbed on Friday, driving the benchmark 10-year yield to a six-week low, as a 2 percent percent slide in domestic shares and a surge in U.S. Treasuries overnight spurred safe-haven buying.

The fall in the Nikkei average .N225 overshadowed a slew of domestic data released on Friday, which showed core inflation accelerating to a decade high and that a surge in energy and food prices is taking a toll on consumer spending. [ID:nT189211]

Analysts said mounting signs that the Japanese economy is losing steam mean monetary tightening is not a viable option for the Bank of Japan, and expectations for an interest rate hike this year have quickly faded over the past two weeks.

"Under normal circumstances, a higher-than-expected CPI reading could reinforce concerns about monetary tightening. But the JGB market is already looking ahead to an economic downturn," said Kazuhiko Sano, chief fixed-income strategist at Nikko Citigroup.

September 10-year futures 2JGBv1 rose 0.50 point to 135.36 and climbed as high as 135.53.

The 10-year yield JP10YTN=JBTC was down 4.5 basis points to 1.600 percent at midday and touched a six-week low of 1.590 percent, falling more than 30 basis points from 11-month highs hit earlier in the month.

The five-year yield JP5YTN=JBTC fell 5 basis points to 1.160 percent, while the two-year yield JP2YTN=JBTC dropped 4 basis points to 0.780 percent.

Overnight index swaps JPONIBOJ=TRDT were pricing in only a 25 percent chance of a BOJ quarter-point rate hike by the year-end, down from 35 percent the previous day and falling sharply after having fully priced in such a move earlier in the month.

Japan's nationwide core CPI, which excludes fresh food prices but includes energy, rose 1.5 percent in May from a year earlier, slightly above a median forecast of 1.4 percent and the fastest annual inflation rise since March 1998. [JPCPI=ECI]

While Japan's industrial output grew an above-forecast 2.9 percent rise in May from a month earlier, the government downgraded its assessment to say production was in a slightly weak to flat trend. [JPIP1=ECI]

JGBs were also supported by gains in U.S. Treasuries, which surged as the Dow Jones industrial average .DJI dropped to a 21-month low.

Jitters about the health of major financial institutions have resurfaced after major U.S. bond insurers had their credit ratings downgraded, and on Thursday Goldman Sachs forecast that Citigroup could write-down about $9 billion more in assets.

"The bond market remains strong, with gains fuelled by declining Treasury yields and bearish stocks," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC.

Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities, said the correlation between JGBs and Treasuries was increasing again after this week's Federal Reserve policy meeting failed to have a decisive impact on debt markets.

On Wednesday, the Fed kept rates at 2 percent as widely expected and signalled that it was more worried about inflation, but the central bank left the door open to keeping interest rates on hold in the coming months.

Traders said the JGB rally over the past two weeks from a sharp sell-off may gradually lose momentum ahead of the BOJ's closely watched June tankan survey, to be released on Tuesday.

If JGB yields decline further, domestic investors such as regional banks could also begin taking profits, particularly in the mid-term sector, traders said. (Editing by Michael Watson)