JGBs inch down on rate worries despite weak output

By Chikako Mogi

TOKYO, May 30 (Reuters) - Japanese government bonds inched lower on Wednesday on worries about future interest rate rises, sending futures prices to a fresh nine-month low, with unexpectedly weak output data spurring only brief short-covering.

Japan's industrial production fell 0.1 percent in April from a month earlier, well below a forecast 0.5 percent rise, but traders said the data failed to alter expectations for a Bank of Japan rate increase as early as the July-September quarter.

"What the market is focusing on is the figures for May and June to gauge the (production) trend for the second quarter. So the weak April data alone does not alter the view that the economy is growing in line with the Bank of Japan's basic scenario," said Makoto Yamashita, chief JGB strategist at Lehman Brothers.

At the same time, it is difficult to start factoring in the specific timing of a BOJ rate hike until the figures for May and June are confirmed, he said.

"The output data was not sufficient for a long-lasting rebound, but it may provide an excuse for the market to pause from recent heavy selling," Yamashita said.

June 10-year JGB futures were down 0.03 point on the day at 133.14 2JGBv1, after hitting a new nine-month low of 133.04 earlier in the session.

The benchmark 10-year yield was unchanged at 1.750 percent, after hitting a four-month high of 1.755 percent on Tuesday.

The two-year yield inched up 0.5 basis point to 0.975 percent JP2YTN=JBTC, a 10-year high. The two-year yield has risen about 10 basis points over the past week.

The December euroyen futures contract JEYv1 was up 0.5 basis point at 99.025, falling from a high of 99.035 hit in early trade after the production data.

Traders said market sentiment remained weak even as investors were still looking to buy bonds on dips, as many players remained wary of the chance of a BOJ rate hike.

"The surprise drop in output for April was less important for the market than the data showing the jobless rate falling to a 9-year low," said a dealer at a foreign securities firm.

JGBs took a beating on Tuesday as surprisingly upbeat figures on jobs and household spending reinforced expectations of a BOJ rate hike in the coming months.