JGBs hit fresh one-month high, tracking Treasuries

TOKYO, May 1 (Reuters) - Japanese government bond futures extended gains to hit a fresh one-month high and 10-year JGB yields hit a one-month low on Tuesday, tracking rallies in U.S. Treasuries the previous session while a fall in Tokyo shares provided support.

Dealers bought JGB bonds they had held off purchasing ahead of the release of the Bank of Japan's twice-yearly economic outlook on Friday.

June 10-year futures climbed 0.22 point to 134.58 after touching a fresh one-month peak of 134.61, with some support from a 0.7 percent drop in the Nikkei average The benchmark 10-year yield was down a basis point at 1.610 percent after touching 1.595 percent in early trade, the lowest level since late March.

''Traders who were cautious about buying JGBs until they saw the BOJ's economic outlook are buying now and pushing yields down,'' said a dealer at a Japanese securities house.

The Japanese central bank's tame inflation outlook in its report along with data showing a steeper-than-expected drop in core consumer price on Friday stirred doubts about how soon the BOJ could lift rates, encouraging market players to buy back short- and mid-term bonds which are sensitive to changes in views about monetary policy.

Five-year yields were down 2 basis points at 1.180 percent after falling as low as 1.175 percent, the lowest level since early April.

Two-year yields slipped 1.5 basis points to 0.840 percent, falling back after having matched a nine-month peak of 0.860 percent hit on Friday.

A majority of market players in a Reuters' survey conducted after the BOJ report expect the central bank to raise interest rates again in the third quarter of this year from the current 0.5 percent, followed by another increase in the first three months of 2008.

However, some have begun to wonder if the BOJ could continue raising rates at the start of the next year, even if it lifts them later this year.

Such a view prompted investors to shift funds back to short-term bonds, said a manager at a Japanese bank's JGB portfolio desk.

Dealers also said strong demand by investors including Japan's huge postal savings fund could cap short- and mid-term yields for now.

Japan Post, which runs the world's largest savings bank and has