JGB futures hit 2-1/2-yr high, BOJ and US data eyed

By Rika Otsuka

TOKYO, March 6 (Reuters) - Japanese government bond futures struck a 2-1/2-year high on Thursday, as global credit jitters and growing expectations of a Bank of Japan rate cut later this year sparked buying of safe-haven government debt.

But JGB futures turned lower in the afternoon as Tokyo stocks extended gains. The Nikkei share average .N225 was up 2 percent in early afternoon, rebounding from a six-week closing low hit the previous day.

March 10-year futures rose in midmorning trade, with hedge funds seen buying back short futures positions as they were forced to unwind their yield-curve-flattening positions, traders said.

That boost in the JGB market also came as U.S. credit market troubles were making waves in Japan, keeping two-year yen swap spreads near an all-time high and driving the benchmark Japanese corporate credit derivatives index to a record peak.

"Investors are taking their cue from a widening in CDS spreads, trying to avoid risks," said Atsushi Ito, a JGB strategist at Morgan Stanley.

The yield curve has been steepening after data showed on Wednesday that Japanese firms' capital spending posted the biggest fall since 2002.

"Investors are likely to pick up more five-year notes as the market could start to expect the economy to slow further," said Morgan Stanley's Ito.

A Reuters poll taken after the release of the capital spending data showed on Wednesday that forecasts for revised October-December gross domestic product figures by 21 economists centred on growth of 0.6 percent from the previous quarter, or an annual pace of 2.3 percent.

That compared with initial readings of real growth of 0.9 percent or 3.7 percent annualised, adding to pessimistic views about Japan's growth prospects for the coming quarters. [ID:nT248831]

March 10-year futures 2JGBv1 rose as high as 138.98, their highest since September 2005, before retreating to 138.71, down 0.03 point on the day. The lead contract will expire on March 11.

The benchmark 10-year yield JP10YTN=JBTC was up 1.5 basis points on the day at 1.385 percent.

But trading activity was light overall as many players stayed on the sidelines, with a batch of important economic events taking place in Japan and overseas in the next two days.

The BOJ starts a two-day policy meeting on Thursday at which it is widely expected to leave monetary policy unchanged. BOJ Governor Toshihiko Fukui, who will retire on March 19, is due to give his last post-meeting news conference on Friday.

The BOJ has left rates at 0.5 percent for the past year.

JGBs had risen sharply in the past week as expectations have grown that a downturn in the U.S. economy will slow the Japanese economy and may prompt the BOJ to cut rates later this year.

Interest rate futures are pricing in a roughly 55 percent chance of a rate cut later this year, up from around 20 percent early last week.

Investors also awaited the U.S. government's monthly employment report on Friday for a clue on how aggressively the Federal Reserve will cut interest rates later this month.

The two-year yield JP2YTN=JBTC slid 0.5 basis point to 0.530 percent, and the five-year yield JP5YTN=JBTC dropped 2 basis points to 0.780 percent.

The 20-year yield JP20YTN=JBTC was up 2.5 basis point at 2.050 percent, while the 30-year yield JP30YTN=JBTC rose 2.5 basis points to 2.310 percent.

The yield curve steepened as a result. (Additional reporting by Satomi Noguchi; Editing by Chris Gallagher)