JGBs hit as stocks rise, 2-yr yield marks 4-mth high

By Chikako Mogi

TOKYO, April 24 (Reuters) - Japanese government bonds fell on Thursday as Tokyo shares rebounded, with the two-year yield hitting a four-month high ahead of an auction for the maturity.

JGB futures erased earlier gains to mark a two-month low as cash bond yields edged higher.

As market worries about a global credit market crisis eased, investors took profits on a plunge in yields, bringing them back towards levels that appear to reflect the view that the Bank of Japan will keep interest rates steady for several months, traders said.

In addition, players were sensing a shift in the direction of global monetary policy, after hawkish remarks from European Central Bank officials suggested the ECB's next move would be to boost rates rather than cut them, analysts said.

ECB officials, including Governing Council member Christian Noyer, said earlier this week that the central bank was prepared to raise rates if needed to bring inflation under control.

"A change in the broad direction of global monetary policy may be affecting trading by foreign investors, particularly as the markets are starting to factor in an ECB rate hike," said Chotaro Morita, chief fixed-income strategist at Barclays Capital.

"Also, as the markets regain some calm, investors see 10-year JGB yields hovering around 1.2-1.3 percent levels are an overshoot given current economic fundamentals in Japan, and are undergoing a correction," he said, adding that players were likely to test 1.5 percent.

The two-year yield JP2YTN=JBTC rose 2 basis points to 0.705 percent, the highest since Dec. 28, as players braced for a Ministry of Finance auction on Thursday of 1.7 trillion yen ($16.43 billion) of two-year notes with a 0.7 percent coupon.

The 0.7 percent coupon matches the level on the maturity's January issue and was expected to draw decent demand, although some traders said investors may remain wary of buying at current yield levels until a clearer market direction emerges.

June 10-year futures 2JGBv1 slipped 0.29 point to 137.56, after falling to a two-month low of 137.51, and off the day's high of 138.11.

The benchmark 10-year yield JP10YTN=JBTC inched up 0.5 basis point to 1.460 percent, approaching a two-month peak of 1.475 percent matched on Wednesday.

The 20-year yield JP20YTN=JBTC rose 1.5 basis points to 2.160 percent.

The five-year yield JP5YTN=JBTC climbed 2 basis points to 0.995 percent, nearing a four-month high of 1.005 percent hit on Tuesday.

Investors were looking for fresh incentives to trade on, having adjusted their bets and unwound distorted positions after a volatile couple of months, traders said.

"The expensive 7- to 10-year zone of the curve has been corrected with the recent selling so investors can't sell those maturities. But they also have no strong reason to buy aggressively," said Koji Ochiai, senior market analyst at Mizuho Securities.

Some traders said investors were waiting for the Federal Reserve's policy decision and key U.S. jobs data due next week, as well as the BOJ's policy meeting and twice-yearly outlook on prices and growth due on April 30.

"Until the BOJ's nuance becomes clearer, investors are likely to refrain from buying bonds actively, especially the shorter maturities," Ochiai said.

The Nikkei stock average .N225 was up 0.4 percent.

December euroyen futures rose 1 basis point to 99.100 JEYv1, after falling to a six-month low for the lead contract of 99.080 on Wednesday.

($1=103.45 yen)