JGB futures jump as stocks fall, shrug off CPI

By Rika Otsuka

TOKYO, Dec 28 (Reuters) - Japanese government bond futures jumped on Friday, boosted by a fall in share prices and an overnight rally in Treasuries, as investors shrugged off data showing inflation in Japan at its highest level in nearly a decade.

Demand from investors wanting to extend the duration of their portfolios also supported longer-dated bonds, while thin volume ahead of the year-end was exaggerating the moves.

Pension funds and insurers often adjust portfolio durations around the month-end to match bond holdings to benchmark indexes such as the Nomura BPI.

The bond market had only a half-day session on Friday, the final trading day of the year. It will resume trading on Jan. 4.

"A slide in U.S. and Japanese share prices, a drop in Treasury yields and month-end bond demand all worked as a tail wind for JGBs," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC.

Government data showed on Friday that Japan's core consumer price index rose 0.4 percent in November from a year earlier, the biggest annual rise since March 1998, mostly due to higher energy costs.

But the inflation report did little to alter views that the Bank of Japan may wait to raise interest rates from the current 0.5 percent until the third quarter of next year because of turmoil in global credit markets and signs of an economic slowdown in Japan.

"The bottom line is that inflation due to a rise in gasoline and food prices is unlikely to prompt the BOJ to raise interest rates," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.

Weakness in other data released on Friday, showing household spending and industrial production declined and job offers hit a two-year low, showed the difficulty the central bank faces as a long-awaited return to rising prices coincides with a softening outlook.

JGBs have been supported over the past few months as doubts of a near-term BOJ rate tightening have grown among investors.

March 10-year futures surged 0.51 point to 136.81 2JGBv1. Volume was light at 25,006 lots.

JGB futures have climbed 2.76 point or 2.1 percent this year, posting the biggest gain since 2002, when they rose 2.8 percent.

The 10-year yield was down 5 basis points at 1.500 percent JP10YTN=JBTC.

The benchmark yield hit this year's peak of 1.985 percent in mid-June as expectations for a near-term BOJ rate tightening heightened. But it fell as low as 1.395 percent last month, its lowest since September 2005, as investors pushed back expectations on the timing of a further BOJ rate rise.

The Nikkei share average .N225 ended Friday down 1.65 percent at 15,307.78, hurt by a firmer yen and a fall on Wall Street. The Nikkei lost 11.1 percent in 2007.

U.S. Treasuries rallied on Thursday as investors flocked to low-risk bonds on weak economic data, a stock-sell off and news that Pakistani opposition leader Benazir Bhutto had been assassinated.

The two-year yield slipped 2.5 basis points to 0.705 percent JP2YTN=JBTC, while the five-year yield fell 4.5 basis points to 1.005 percent JP5YTN=JBTC.

Longer-dated bonds outperformed the rest of the market on month-end demand linked to portfolio extensions.

The 20-year yield was down 5.5 basis points to 2.090 percent JP20YTN=JBTC, while the 30-year yield fell 5 basis points to 2.325 percent JP30YTN=JBTC. (Editing by Michael Watson)