JGB futures hit 6-week low as Nikkei extends rally

By Eric Burroughs

TOKYO, April 17 (Reuters) - Japanese government bond futures slid to a six-week low on Thursday as the Nikkei share average rallied for a third day, boosted by solid gains on Wall Street after an array of reassuring earnings reports.

A tumble in U.S. Treasuries on the back of the gains in stocks also added to selling pressure in JGBs as investors shifted funds away from the safe-haven bonds.

JGBs have retreated as investors hope that the worst of the financial crisis stemming from defaults on U.S. subprime mortgages has passed, with quarterly results from top U.S. banks JPMorgan Chase (JPM.N) and Wells Fargo (WFC.N) showing they were coping with the troubles. [ID:nN16365624]

The renewed stability in equity markets has also prompted investors to see less risk of the Bank of Japan cutting rates later in the year, with the implied chance of a quarter-point cut falling to around 15 percent from near 50 percent earlier in the month.

"The chance of a rate cut is very low," said Nhan Ngoc Le, an interest rate strategist at ABN AMRO.

The Nikkei share average .N225 pushed up 2.3 percent and is now up some 15 percent from its lows this year.

Analysts said that comments from new BOJ Governor Masaaki Shirakawa indicated he was set to maintain the central bank's hawkish stance emphasising the need to normalise monetary policy and short-term rates in the long run.

JGBs may be in store for more losses as the lead futures contract broke below chart levels.

June 10-year futures 2JGBv1 fell 0.46 point to 139.03. It hit a six-week low of 138.84, breaking support levels at 139.13 and near 139.00 along the way.

The next level of chart support comes at 138.64 and then near 138.45.

The benchmark 10-year yield JP10YTN=JBTC rose 2.5 basis points to 1.375 percent.

The five-year yield JP5YTN=JBTC jumped 3.5 basis points to 0.895 percent and hit a two-month high of 0.905 percent. The two-year yield JP2YTN=JBTC climbed 2 basis points to 0.640 percent and hit a three-month peak of 0.645 percent.

But longer-dated bonds outperformed on steady demand from institutional investors looking for higher yields further out the curve, putting more pressure on the yield curve to flatten.

Thirty-year yields JP20YTN=JBTC rose a basis point to 2.420 percent.

The market shrugged off more data showing deteriorating sentiment among Japan's major manufacturers.

The Reuters Tankan survey, which closely tracks the BOJ's quarterly poll, fell to a five-year low of plus 1 in April from plus 8 in March due to rising raw material costs and sluggish demand. [JP/TAN1]