JGBs trim gains on profit-taking after rally

TOKYO, Aug 16 (Reuters) Japanese government bond futures trimmed some gains after hitting a five-month high on Thursday as troubles in overseas credit markets tempered expectations for a near-term Bank of Japan interest rate rise.

JGB futures rose as high as 135.16 in early trade, the highest since early March after U.S. equities fell sharply the previous session.

U.S. stocks slid after shares of the No. 1 U.S. mortgage lender, Countrywide Financial, plunged on a brokerage downgrade and rumours it was having trouble raising money.

JGB futures also trotted higher initially as the Nikkei share average slid 2 percent, but later lost some steam.

''There is some selling in wake of the recent rally,'' said Kazuhiko Sano, chief strategist for fixed income research at Nikko Citigroup.

Some investors are likely taking profits after a drop in JGB yields in the previous session, Sano said.

JGB futures fell 0.12 point on the day to 134.88 The benchmark 10-year yield rose 3.0 basis points to 1.665 percent pulling away from a three-month low of 1.635 percent hit on Wednesday.

Swap contracts on the overnight call rate showed that investors now see a 25 percent chance of a 25-basis-point BOJ rate rise to 0.75 percent this month, down sharply from 75 percent at one point last Thursday The implied probability of a rate rise at the BOJ's Aug.

22-23 policy meeting rose slightly from around 20 percent on Wednesday.

The swap contracts also suggested investors continued to have some doubts about the prospects of a rate rise next month, with the chances of a September hike seen at roughly 65 percent.

In the money market, the BOJ offered to supply 400 billion yen in funds on a same-day basis at its regular 0020 GMT operation.

The overnight call rate had traded at around 0.52 percent to 0.54 percent ahead of the BOJ fund injection, up slightly from the central bank's 0.50 percent target, traders said.

Rates eased slightly after the operation, with some trades done at around 0.49 percent to 0.50 percent, they said.

Reuters SZ VP0652