JGBs futures hit 1-month high on Nikkei slump

By Naomi Tajitsu

TOKYO, Jan 10 (Reuters) - Japanese government bond futures rose to a one-month high on Thursday, boosted by a slide in domestic stocks and as the possibility of a U.S. recession prompted investors to pick up bonds.

JGBs recovered from early losses driven by a stumble in U.S. Treasuries overnight, as the Nikkei share average .N225 slipped 0.80 percent by the end of the morning session.

Growing expectations that the U.S. economy is heading towards a recession have raised the chances of the Federal Reserve cutting interest rates by 50 basis points this month and continuing its rate-cutting campaign throughout the year.

Further reductions in the fed funds rate from 4.25 percent would make it extremely difficult for the Bank of Japan to raise rates this year, which analysts said would continue to support the JGB market.

"The market is increasingly factoring in a zero risk premium of a (BOJ) rate rise this year," said Freddy Lim, fixed income strategist at Morgan Stanley in Tokyo.

BOJ Deputy Governor Toshiro Muto on Thursday said that the U.S. economic slowdown was accelerating and that there was a need to consider the possibility of it worsening, adding that a slowdown in Japan was likely to continue in the near term.

March futures 2JGBv1 ended the morning session 0.25 point higher at 137.65, just off a one-month high of 137.67 hit earlier. A climb above 137.73 hit last month would put the lead contract at its highest point in two years.

Shorter maturities led JGB gains, with the two-year yield JP2YTN=JBTC slipping 1.5 basis points to a 15-month low of 0.645 percent, while the five-year yield JP5YTN=JBTC fell two basis points to 0.925 percent, its lowest in nearly two years.

The 10-year yield JP10YTN=JBTC slipped two basis points to 1.445 percent, edging close to a one-month low of 1.440 percent hit the previous day, as investors picked up the maturity despite less-than-stellar demand at an auction on Wednesday.

Longer maturities struggled to keep up with the rest of the market's rise, with the 30-year yield JP30YTN=JBTC inching up half a basis point to 2.345 percent.

The 20-year yield JP20YT=JBTC slipped a basis point to 2.090 percent, but a limited price gain compared with five-year notes expanded the yield spread between the two maturities to 116.5 basis points, its widest since early 2006.

ANOTHER SHOCK?

Even as the 10-year yield hovered near a one-month low, analysts said a sustained slide below 1.4 percent would require additional gains in Treasuries on more evidence of a U.S. recession and further problems in credit markets.

"The market needs another shock to chase yields much lower," said Tatsuo Ichikawa, fixed income strategist at ABN AMRO Securities.

He added that earnings reports from U.S. financial institutions in the coming weeks may show that many continue to suffer from the credit crunch, which could keep demand high for safe-haven government bonds.

Following Muto's speech to business leaders in northern Japan, the deputy governor, seen as the leading candidate succeed Governor Toshihiko Fukui when his term ends in March, will give a press conference later on Thursday.

Analysts said more references to U.S. economic weakness and the possible impact on Japan may suggest the central bank could tweak its policy outlook later this month to reflect the difficulties of lifting its overnight rate from 0.5 percent this year.

This could prompt more JGB buying, they said. (Editing by Hugh Lawson)