JGB futures sink on BOJ outlook, Bernanke

By Rika Otsuka

TOKYO, June 10 (Reuters) - Japanese government bond futures plunged to a 10-month low on Tuesday, as expectations other major central banks will raise interest rates this year were seen paving the way for a potential hike by the Bank of Japan.

Federal Reserve Chairman Ben Bernanke on Monday sounded a warning over soaring energy costs and said the U.S. central bank would "strongly resist" any tendency for an inflationary psychology to take hold.

Bernanke's comments fueled jitters among bond investors, who were already nervous after European Central Bank President Jean-Claude Trichet said last week that euro zone interest rates might go up as soon as next month.

Swap contracts on the overnight call rate now show that investors see a roughly 80 percent chance of the BOJ boosting rates by 25 basis points to 0.75 percent by the year-end, nearly double a roughly 45 percent probability seen in early trade JPONIBOJ=TRDT.

JGBs have been hit by heavy selling in the past two months, and their weakness has been compounded in recent weeks as a surge in oil prices to record highs stokes concerns about inflation.

"The JGB market is getting a big influence from the global interest rate outlook," said Atsushi Ito, fixed-income strategist at Morgan Stanley.

"A question still remains whether the BOJ will really raise interest rates," he said. "But at the moment, investors believe JGB yields are on a rising trend, convinced that other central banks are more concerned about inflation than problems in the financial sector."

June 10-year futures 2JGBv1 slid as much as 1.90 points to 133.15, their lowest since early August, before recovering slightly to 133.28, down 1.77 points on the day. The 10-year yield jumped 10 basis points to 1.815 percent JP10YTN=JBTC, a 10-month peak.

The five-year yield surged 19 basis points to 1.495 percent JP5YTN=JBTC, its highest since late July.

The two-year yield was up 13.5 basis points at 0.980 percent JP2YTN=JBTC, a 10-month high.

"Investors are dumping JGBs due to a global short-term bond sell-off, trying to limit bond losses," said a senior trader at a European brokerage.

U.S. Treasuries slid on Monday, with short-dated bond yields posting their biggest one-day jump in 25 years, on expectations the Fed will raise rates later this year to fight inflationary pressures.

The market's focal point on Tuesday is the Finance Ministry's auction of 1.9 trillion yen ($17.9 billion) in five-year debt, seen as a barometer of investor demand after unusually high volatility in the JGB market in the past three months.

The coupon was set at 1.5 percent, up from 1.3 percent at the previous month's auction and the highest since 1.5 percent at a July 2007 auction.

Despite the higher coupon, analysts and traders were worried the debt sale would attract demand from only a limited number of investors as a global surge in shorter-dated bond yields could keep banks, the main players in the five-year sector, on the sidelines.

The lead euroyen futures contract fell as low as 98.705, a 12-year trough, before recovering to 98.760 JEYv1, down 17.5 basis points on the day.

Government data showed that Japan's core machinery orders, a leading gauge of capital spending, rebounded in April after a two-month streak of declines, but the economic outlook remained murky with firms facing risks of inflation and slowing growth.

Tuesday's data, which came a day before the release of revised first-quarter growth figures, did little to alter the view that the BOJ will sit tight on rates for a while.

(Editing by Brent Kininmont)