JGB futures edge down, weak data limits losses
TOKYO, Jan 30 (Reuters) - Japanese government bond futures edged down on Wednesday as investors booked more profits from this month's rally, but losses were limited after weak production data supported expectations for a Bank of Japan rate cut.
Investors sold short- and medium-term cash bonds that they snapped up during the stock market plunge that drove the Nikkei share average to 2-½ year lows last week.
Dealers said investors rushed to cut back positions ahead of the outcome of the Federal Reserve's two-day policy meeting later in the day and an auction for two-year JGB notes on Thursday.
Futures stayed under selling pressure even after rebounding into positive territory at one point, helped by data that showed Japan's industrial production rose less than expected in December.
"Market players are still heavily in long positions in short- and medium-term notes, which saw steep falls in yields this month," a senior interest rate derivative trader at a Japanese bank said.
"Position adjustment is outweighing the positive impact of the economic data."
March 10-year futures 2JGBv1 fell 0.07 point to 137.43, having earlier risen to 137.55 from the day's low of 137.25. Futures had rallied to a 28-month high of 139.15 last week.
The five-year yield JP5YTN=JBTC rose 1.5 basis points to 0.915 percent and climbed as high as 0.920 percent, up 15.5 basis points from a two-year low hit last week.
The two-year yield JP2YTN=JBTC rose 2 basis points to 0.565 percent. The two-year last week fell as far as 0.485 percent on growing expectations for a BOJ rate cut this year, pushing it below the central bank's overnight rate target of 0.5 percent.
The benchmark 10-year bond yield JP10YTN=JBTC inched down a half basis point to 1.460 percent, but stayed well above a 28-month low of 1.310 percent hit last week.
GLOOMY OUTLOOK
Japan's December production data suggested that companies are starting to feel the effect of slowing U.S. growth and a domestic housing slump. Their gloomy output forecasts for January and February kept investors worried that a potential U.S. recession might force the BOJ to cut interest rates this year.
"The production outlook for both January and February is worsening. It is a big concern for the economy," said Tetsuya Miura, a bond strategist at Shinko Securities.
"The data is likely to provide support to the JGB market."
Japan's industrial output rose 1.4 percent in December from the previous month, falling short of an expected increase of a 2.0 percent.
Manufacturers' output, the core component of production, is expected to fall 0.4 percent in January and to drop 2.2 percent in February, data showed. [ID:nT87979]
On Tuesday, fed fund futures showed investors pared perceived chances for the Fed to cut rates by a half percentage point on Wednesday when it ends a two-day policy meeting, though they were still betting strongly on such an outcome following last week's emergency rate cut.
