JGB futures hit 11-mth low, eyes on BOJ Shirakawa

By Shinichi Saoshiro

TOKYO, June 13 (Reuters) - Japanese government bond futures fell over a full point to an 11-month low on Friday, after losses in U.S. Treasuries overnight and amid jitters before a news conference by Bank of Japan Governor Masaaki Shirakawa.

The lead three-month euroyen futures contract sank to a 12-year low of 98.675 JEYv1 as market players waited to see whether Shirakawa would emphasise a need to quell inflation.

JGBs have been roiled in the past week due to surprisingly blunt inflation-fighting rhetoric from central bankers in Europe and the United States that has been seen as opening the way for a potential BOJ rate rise later this year.

"The morning decline implies that the market is preparing for the possibility of the BOJ being unable to fully distance itself from the anti-inflation rhetoric,"said Chotaro Morita, chief fixed-income strategist at Barclays Capital in Tokyo.

"The BOJ is unlikely to fall completely in line with the Fed and ECB's hawkish view, though there is now a possibility of the BOJ tweaking its stance," Morita said.

September 10-year JGB futures fell 1.03 point to 132.18, having briefly touched an 11-month low of 132.05 2JGBv1.

The benchmark 10-year JGB yield rose as much as 8 basis points to 1.875 percent, an 11-month high JP10YTN=JBTC.

The BOJ is widely expected to keep interest rates unchanged at 0.50 percent at a two-day policy meeting that ends on Friday.

LONG-END GETS REPRIEVE

But swap contracts on the overnight call rate show that investors now see a roughly 95 percent chance of the BOJ raising interest rates to 0.75 percent by year-end, up from a less than 50 percent probability seen earlier in the week.

The contracts also show a roughly 65 percent chance of two BOJ rate rises to 1.0 percent over the next year. JPONIBOJ=TRDT

Two-year JGB yields, the sector most sensitive to shifts in monetary policy, rose 3.5 basis points to 1.020 percent after briefly touching a fresh 10-month high of 1.025 percent JP2YTN=JBTC.

The yield curve bear-flattened as yield rises in the super-long zone were capped by investor bargain hunting, said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC.

Yields on super-long bonds rose less than those on 10-year bonds, with the 30-year yield rising by a comparatively mild 2.5 basis points to 2.540 percent JP30YTN=JBTC.

Analysts said it was hard to predict how the JGB yield curve might move.

The JGB market has turned dysfunctional with futures the main source of volatility, said Tetsuya Miura, fixed-income strategist for Shinko Securities.

"There is no point discussing what an appropriate shape of the curve should be under such conditions," Miura said.

Stronger-than-expected U.S. retail sales data released on Thursday appeared to increase chances for the Federal Reserve to hike rates this year, and the two-year Treasury note yield topped 3 percent, the highest level since early January. (Editing by Chris Gallagher)