JGBs slip on weak Treasuries, rate outlook weighs

TOKYO, June 23 (Reuters) Japanese government bond prices fell on Friday, following a drop in the U.S. Treasury market and on expectations the Bank of Japan could raise interest rates as early as next month.

U.S. Treasury prices fell on Thursday on speculation the Federal Reserve might raise interest rates by half a percentage point at its meeting on June 28-29, pushing the benchmark 10-year yield to a four-year high above 5.21 percent and the two-year yield to its highest level since December 2000.

The Fed is widely expected to raise interest rates by a quarter point to 5.25 percent next week to contain inflation. The market also expects the Fed to raise rates in August.

''The JGB market is weighed by the drop in Treasuries,'' said Kenro Kawano, fixed income strategist at Credit Suisse.

''The market is also under selling pressure as it didn't fall much despite a huge rally in the stock market yesterday. Investors remain cautious about buying shorter maturities on expectations for a BOJ rate hike next month,'' he said.

Traders said while it remained unclear if BOJ Governor Toshihiko Fukui would be forced to resign over the row surrounding his personal finances, the central bank appeared to remain on course for the first interest rate increase in six years if conditions were met.

Government officials have so far shown support for Fukui, who has come under increasing public scrutiny over his investment in a fund lead by a manager who was recently arrested for suspected insider trading.

Fukui has said he will stay in his post, and reiterated that his finances issue would not affect monetary policy decisions.

Traders said the market's focus was on the probability of further BOJ rate increases after the first one.

''If prospects look dim for an aggressive tightening after the first one, then short- to medium-term maturities will present a September futures were down 0.19 point at 132.09.

The yield on the benchmark 10-year JGB rose two basis points to 1.870 percent. The two-year yield was unchanged at 0.805 percent while five-year yield was up one basis point at 1.360 percent.

The Nikkei stock average was 0.84 percent lower at 15,007.87 after ending above 15,000 for the first time in two weeks on Thursday.

The key December euroyen interest rate futures were unchanged at 99.340 indicating a three-month interbank rate of 0.660 percent by that time.

REUTERS VJ BST0633