JGB futures hit 2-mth low on Treasuries, Nikkei
* JGB futures dip after overnight tumble in U.S. bonds
* Rebound in Tokyo shares pressures bonds further
* BOJ tankan shows Japan business sentiment turns negative
By Shinichi Saoshiro
TOKYO, Oct 1 (Reuters) - Japanese government bond futures slipped to a two-month low on Wednesday following a tumble in U.S. Treasuries the previous day on chances that Washington can still pass a bank bailout plan to stem the credit crisis.
A rebound by Tokyo shares in response to Tuesday's rally on Wall Street also increased the pressure on bonds.
Some bargain-hunting emerged after the Bank of Japan's closely watched tankan survey showed business sentiment turned negative in the third quarter for the first time in more than five years. [BOJ/QTR1]
But analysts said most of the market's attention was on how the U.S. bailout saga would unfold.
"Bargain-hunting did emerge on the weak Tankan. But the impact from domestic fundamentals is limited as the market is focused on what U.S. lawmakers will do next," said Shinji Nomura, chief market analyst at Daiwa Securities SMBC.
President George W. Bush and congressional leaders pledged to continue talks on the $700 billion plan to stem the credit crisis after its shock rejection by the House of Representatives on Monday.
In the Tankan, the headline index for large manufacturers was minus 3 against the median market forecast of minus 2.
It was the first negative reading since June 2003, underlining deteriorating corporate sentiment amid a global economic slowdown.
December 10-year futures 2JGBv1 fell 0.79 point to 136.75 after hitting 136.39, the lowest since late July.
Market players said thin trade exacerbated movements in futures, especially ahead of Thursday's 1.9 trillion yen ($17.92 billion) 10-year debt auction.
"The effectiveness of futures as instruments for hedging has diminished recently, and the swings we are seeing ahead of the auction are a reflection of that," said Tatsuo Ichikawa, fixed-income strategist at RBS Securities.
"Volatility in the futures market could increase as many dealers may delay hedging for the auction until they see further developments in the U.S. bailout plan," said Ichikawa.
The two-year yield inched up 1 basis point to 0.765 percent JP2YTN=JBTC.
The 20-year yield climbed 2 basis points to 2.150 percent JP20YTN=JBTC.
The yield curve steepened as investors have sought refuge in the short-end while longer-dated maturities sagged in part on supply concerns.
"Investors are more cautious towards purchasing JGBs of longer maturities due to wariness over government spending," said Nomura at Daiwa Securities SMBC.
Japan's cabinet this week approved an extra budget to fund $17 billion in economic spending to ease the strains of high energy and food prices. Prime Minister Taro Aso vowed to get the extra budget, to be partially funded by debt, passed in parliament to underpin an economy widely seen to be in a recession. [ID:nLT390273]
Total debt issuance for the fiscal year will remain even since the government's plan is to reduce the amount of bonds to be issued this year aimed to fund next year's budget, the market is worried about economic spending packages eventually snowballing, analysts said.
The benchmark 10-year yield JP10YTN=JBTC rose 2.5 basis points to 1.485 percent.
The Nikkei stock average .N225 advanced 1.2 percent. [.T] (Editing by Sophie Hardach)
