JGBs edge up with Treasuries, tankan awaited

By Eric Burroughs

TOKYO, June 30 (Reuters) - Japanese government bonds edged up on Monday, getting a lift from the rise in U.S. Treasuries late last week and as Tokyo shares struggled near two-month lows.

But gains were kept in check as investors wondered how much further the JGB rally could run after benchmark 10-year yields posted their biggest weekly drop in four years last week.

Market players are now awaiting the Bank of Japan's quarterly tankan survey of business sentiment on Tuesday to see how much the surge in oil and commodity prices has hurt confidence and the capital spending plans of big companies.

In a Reuters poll, the headline tankan index of sentiment at big manufacturers is projected to fall to plus 3 -- its lowest in five years. But capital spending plans for the current fiscal year are expected to show an increase of 2.0 percent after a cut of 1.6 percent in the March survey. ECONJP

Kenro Kawano, senior interest-rate strategist at Credit Suisse, said the tankan survey should highlight the conflicting signals confronting investors: deteriorating confidence in the economy but a worsening in inflation pressures as well.

"This is an unclear situation that many investors have not seen in a while, so volatility should remain high," said Kawano.

Credit Suisse is expecting the 10-year yield to fall towards 1.5 percent in coming months and sees the possibility of it dropping as low as 1.3 percent by the end of the year as investors take stock of the economy's troubles.

JGBs have powered back from a three-month sell-off as global stocks have retreated on new worries about the health of major financial institutions and doubts have cropped up over how quickly the Bank of Japan could consider raising interest rates.

U.S. stocks retreated further on Friday, briefly pushing the Dow Jones industrial average .DJI into bear-market territory, as oil vaulted to record peaks near $143 a barrel CLc1 and data showed consumer sentiment hitting a 28-year low.

The worries about the U.S. economy, along with fears about how much more in asset write-downs U.S. banks could report in quarterly earnings next month, have spooked investors and pushed investors into safe-haven bonds.

September 10-year futures 2JGBv1 edged up 0.13 point to 135.36.

The benchmark 10-year yield JP10YTN=JBTC was unchanged at 1.610 percent, having dropped 15 basis points on the week for the biggest such drop since August 2004.

But for the March-June quarter, 10-year yields are still up 33.5 basis points, what would be the biggest quarterly rise in four years.

The five-year yield JP5YTN=JBTC was unchanged at 1.180 percent, near a six-week low of 1.155 percent hit on Friday. The 20-year yield JP20YTN=JBTC edged down half a basis point to 2.170 percent.

The yield curve between five- and 20-year yields flattened half a basis point to 99.0 basis points after having steepened by about 3 basis points last week.

(Editing by Brent Kininmont)