JGB futures hit 4-month high on bleak growth outlook

* JGB futures hit 4-month highs on bleak economic outlook

* Players look to buy on any rise in yields for income gains

* CPI-linked JGB sale, upcoming Treasuries supply eyed

By Chikako Mogi

TOKYO, Aug 6 (Reuters) - Japanese government bond futures rose to four-month highs on Wednesday as investors bought when prices dipped and dealers covered short positions, with worries about Japan's economic outlook continuing to support sentiment.

September 10-year futures rose as high as 137.05 2JGBv1, up 0.30 point on the day and their highest since late April, after prices fell as low as 136.48 in early trade on hedging before a 10-year inflation-linked bond auction on Thursday.

A bleak economic outlook in Japan, the United States and the euro zone is seen limiting any rise in yields, so now is a good buying opportunity, traders said.

"Players see U.S. economic troubles being exported to Japan and the euro zone, so any rise in Treasuries yields is taken as a sign that bonds in Japan and the euro zone should be bought," said a dealer at a Japanese bank.

He added that dealer receiving in seven-year swaps was driving the move in futures, while a trader at another Japanese bank said such positioning was also seen across the curve, but receiving was particularly strong in medium- to 10-year swaps.

Investors were looking to buy bonds to pick up income gains ahead of the end of September, when the first half of Japan's financial year ends, traders said.

"It's purely driven by the drive to buy on dips for income gains, particularly when 10-year yields rise above 1.55 percent, as there are no expectations the Bank of Japan will raise interest rates," said the trader at the second bank.

The benchmark 10-year JGB yield eased 1 basis point to 1.535 percent JP10YTN=JBTC, slipping from the day's high of 1.565 percent. The yield came off a four-month low of 1.495 percent hit on Monday.

JGBs climbed despite a 2.2 percent gain in the Nikkei average .N225, because traders said many JGB market players believe the stock market rise is unsustainable.

SUPPLY CONCERN

Gains may be limited ahead of an auction in Japan and new supply in the Treasuries market.

The Ministry of Finance will sell 500 billion yen ($4.6 billion) of consumer price index-linked JGBs on Thursday, following an offer of 1.9 trillion yen in 10-year fixed-rate bonds on Tuesday.

U.S. Treasuries retreated on Tuesday as a rally on Wall Street and lower oil prices drew investors away from safe-haven government debt while upcoming new supply of 10- and 30-year debt securities this week also weighed on sentiment. [US/]

"Players are wary of new supply in JGB and Treasuries markets this week, with sentiment particularly hurt by expectations the CPI-linked JGB auction will be weak as oil prices are falling," said Makoto Yamashita, chief JGB strategist at Lehman Brothers.

Oil prices fell below $120 per barrel CLc1 on Tuesday to a three-month low. [O/R]

The Federal Reserve kept interest rates steady at 2 percent as widely expected, and analysts said Tuesday's Fed statement was more balanced than the market had expected as it expressed concern about both economic growth and inflation. [ID:nN05304800]

That left few clues as to when the Fed might raise interest rates. FEDWATCH

The Treasury Department plans to sell $17 billion of 10-year notes on Wednesday and $10 billion of 30-year bonds on Thursday. ($1=108.27 Yen) (Editing by Michael Watson)