JGB futures jump from 10-month low on Treasuries

By Shinichi Saoshiro

TOKYO, June 12 (Reuters) - Japanese government bond futures rebounded on Thursday from 10-month lows hit the previous day, lifted by Treasury gains overnight and a 2 percent drop in the Nikkei stock average.

But gains were exaggerated by relatively low volume, with investors sidelined as the Bank of Japan starts a two-day policy board meeting on Thursday.

"JGBs were bound to rise after the plunge in Wall Street, but the market has been subdued thus far," said Kazuhiko Sano, chief fixed-income strategist for Nikko Citigroup.

The BOJ is widely expected to keep rates at 0.50 percent at this week's meeting. Market players are waiting to see whether the central bank will follow its overseas counterparts in emphasising a need to rein in inflationary pressures.

In March, Japan's core consumer price index climbed 1.2 percent from a year earlier, a decade high, before slowing to a rise of 0.9 percent in April.

In the spotlight will be BOJ Governor Masaaki Shirakawa's news conference after the meeting ends on Friday.

"The governor has not mentioned inflation being linked with rate hikes, but there are many participants who believe he should," said Sano at Nikko Citigroup. "They, unfortunately, are moving the market right now."

September 10-year JGB futures surged 0.64 point to 133.47 2JGBv1, moving away from a 10-month low of 132.76 hit on Wednesday. During Wednesday's evening session, the lead futures contract fell as low as 132.69 1JGVv1.

The benchmark 10-year JGB yield fell 5 basis points to 1.790 percent JP10YTN=JBTC. It rose to a 10-month high of 1.845 percent on Wednesday.

The five-year yield slid 5 basis points to 1.455 percent JP5YTN=JBTC, falling from an 11-month peak of 1.510 percent reached the previous day.

The 20-year yield fell 3.5 basis points to 2.310 percent JP20YTN=JBTC. The yield curve steepened as a result.

Tokyo's Nikkei share average .N225 was down 2.3 percent by midday.

Along with U.S. and euro zone bonds, JGBs have been hammered in the past week due to surprisingly blunt inflation-fighting rhetoric from central bankers in Europe and the United States.

Such remarks have stoked market expectations that the Federal Reserve and the European Central Bank will raise interest rates in coming months, and have stoked jitters that the BOJ might also boost rates.

Following days of high volatility, comments by ECB officials suggesting the central bank may not conduct a succession of rate hikes soothed JGB market sentiment.

Juergen Stark and Christian Noyer said on Wednesday that markets had understood the ECB's signal about possibly hiking rates, but that ECB policy makers were not talking about a series of rate increases. [ID:nLA287438]

"The market has been at the mercy of hawkish remarks from the ECB all week, so players took the latest comments from the policy makers to readjust their positions," said Atsushi Ito, fixed-income strategist for Morgan Stanley.

Swap contracts on the overnight call rate now show that investors see a roughly 80 percent chance of the BOJ lifting rates by 25 basis points to 0.75 percent by year-end. JPONIBOJ=TRDT

U.S. Treasuries rallied on Wednesday as weaker stocks, a jump in crude oil and rumoured investment banking losses drew buyers back to safe-haven government debt. [US/] (Editing by Chris Gallagher) (shinichi.saoshiro@thomsonreuters.com; +81-3-6441-1774; Reuters Messaging: shinichi.saoshiro.reuters.com@reuters.net))