JGBs slide further as Nikkei extends rally
TOKYO, Jan 25 (Reuters) - Japanese government bonds tumbled for a third straight day on Friday, taking a hit from the solid gains in stocks that cooled some of the expectations for a Bank of Japan interest rate cut this year.
JGB futures slid more than a half-point and bond yields jumped as some investors sold back bonds scooped up during the stock market plunge that drove the Nikkei share average to 2-1/2-year lows earlier this week.
The Nikkei average .N225 rallied nearly 3 percent, tracking a rise on Wall Street overnight on hopes that a near-term U.S. economic stimulus package will help limit the economy's downturn this year.
But so far in January the Nikkei has still lost nearly 13 percent on fears that export-dependent Japan could follow the United States into a recession.
The recovery in equities prompted interest rate futures JPONIBOJ=TRDT to trim the chance of a BOJ rate cut at its next meeting in February to about 10 percent from about 20 percent the previous day.
The chance of a rate cut this year fell back to about 50 percent from a peak of 80 percent this week, but it still marks a sharp shift from the start of the year when the market was still seeing a small risk of a BOJ rate increase.
"The market is already taking some of this back, but I also think the chance of a rate hike is not really there," said Freddy Lim, an interest rate strategist at Morgan Stanley.
Investors remain divided about what the BOJ's next move will be, with a Reuters poll earlier this week showing a majority of market players believed it would be an eventual rate hike. [BOJ/INT]
BOJ Governor Toshihiko Fukui said in parliament on Friday that the central bank will keep its current accommodative policy stance to support stable economic growth.
March 10-year futures 2JGBv1 fell 0.67 point to 137.59 and were well below a 28-month high of 139.15 reached on Tuesday in evening trade.
The benchmark 10-year bond yield JP10YTN=JBTC jumped 6 basis points to 1.445 percent and is now up 13.5 basis points from the 28-month low hit earlier in the week. Five-year JGBs were hit the most JP5YTN=JBTC, with their yields surging 7.5 basis points to 0.890 percent to be up 12.5 basis points from a two-year low hit this week.
The two-year yield JP2YTN=JBTC, the most sensitive to the BOJ policy outlook, rose 4 basis points to 0.545 percent.
Earlier in the week the two-year yield fell below the BOJ's 0.5 percent target for overnight rates for the first time, underscoring the shift in expectations towards a rate cut.
Data on Friday showed Japan's core consumer price index -- which excludes fresh food but includes energy prices -- jumping to a 0.8 percent annual pace, the fastest in a decade.
But economists said the figures were negative for the economic outlook because the rise in prices was driven by food and energy, which would erode what little income gains households are receiving and hurt consumer spending. "I don't think this pattern would support a BOJ rate hike, which now almost no one expects," said Kiichi Murashima, director of economic and market analysis at Nikko Citigroup.
