JGB futures gain on Nikkei fall, firm longer bonds

By Satomi Noguchi

TOKYO, Nov 24 (Reuters) - Japanese government bond futures rose on Tuesday as the Nikkei share average fell and as some investors picked up longer-dated cash bonds on dips.

Expectations of month-end buying also put downward pressure on longer maturities, although some felt the pace of JGB yield drops could slow after the benchmark 10-year note yield slid below 1.30 percent last week for the first time in about a month.

Analysts and traders said JGBs held firm after the government published a report on Friday pronouncing the economy officially in deflation for the first time since 2006.

'The market focus on deflation is positive for JGBs for the short term,' said RuiXue Xu, a rates strategist at RBS Securities Japan. 'But it will be negative for JGBs in the long run because it could prompt the government to loosen fiscal discipline.'

Japanese government officials became increasingly vocal about criticising the Bank of Japan, with banking minister Shizuka Kamei saying that the central bank was not paying attention to actual economic conditions, adding that it was 'asleep at the wheel'.

Some market players speculate that the Bank of Japan could soon find itself under pressure to buy more government bonds to strengthen its commitment to a very easy monetary policy, analysts said.

But most participants remain doubtful about such a development for now, after Bank of Japan Governor Masaaki Shirakawa said on Friday there had been no change in the central bank's stance on maintaining very low interest rates, capping gains in short- and medium-term notes, traders said.

But JGBs look to have more room for gains if the prospects for a weak economic start to next year grow despite the BOJ upgrading its view on the economy, with some investors watching the falling Japanese equity market for guidance on the health of the economy, one senior trader for an European bank said.

'Many market players are on hold at the moment after steep gains in the market for the past weeks,' said the senior trader.

'But the market may resume its rally and demand more monetary easing steps from the BOJ once we find data which convinces the market about economic weakness in the first quarter or the first half of next year.'

December futures rose 0.19 point to 139.44 after climbing as high as 139.46, near a six-week high of 139.56 touched on Friday. The benchmark 10-year yield fell 1.5 basis points to 1.290 percent retreating back towards Friday's low of 1.285 percent, its lowest since mid-October.

Longer-dated bonds were firmer with the 20-year yield down a basis point at 2.025 percent, matching a six-week low first reached on Friday. The 30-year yield fell to a six-week low of 2.180 percent.

But shorter maturities lagged with the two-year yield edging up half a basis point to 0.245 percent ahead of a sale in the maturity on Wednesday.

The five-year yield was steady at 0.590 percent .

Japan's sovereign five-year credit default spread continued to widen -- though only slightly -- on Tuesday as the Nikkei share average fell to its lowest close in four months.

Dealers said it changed hands at 71 basis points on Tuesday, up from around 64 points last week after tightening from a seven-month high reached earlier this month on fiscal concerns.



(Additional reporting by Shinichi Saoshiro; Editing by Joseph Radford)

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