JGB futures scale 17-month high as equities slump

TOKYO, Aug 17 (Reuters) Japanese government bond futures extended gains to hit a 17-month high on Friday as slumping equities raised doubts about chances of the Bank of Japan raising interest rates in the near term.

The Nikkei average extended losses on Friday, with exporters hit again after the U.S. Dow fell amid credit fears and the yen appreciated further.

Fears of a worsening global credit crunch have kept investors dumping risky assets such as equities and carry trades and invest in safer government securities, particularly shorter-dated maturities.

''The JGB market is getting a boost from the risk reduction moves and price swings are sharper in a market where major Japanese players are absent due to Japanese summer holidays,'' said a dealer at a Japanese securities firm.

JGB 10-year futures rose as high as 135.74 up 0.69 point on the day and the highest level since March 2006.

The two-year yield hit a four-month low of 0.815 percent down 5 basis points on the day.

The benchmark 10-year yield fell 2 basis points to 1.635 percent after hitting a three-month low of 1.625 percent on Thursday.

The five-year yield hit a five-month low of 1.145 percent, down 4 basis points.

The Nikkei average extended losses, falling 2 percent.

Swap contracts on the overnight call rate showed that investors now see only about a 15 percent chance of a 25 basis point BOJ rate rise to 0.75 percent at the central bank's policy meeting on Aug 22-23, down sharply from 75 percent at one point last Thursday In the money market, the BOJ offered to supply 1.2 trillion yen (.48 billion) of funds to the banking system on Friday as the overnight call rate pushed slightly above the central bank's 0.5 percent target.

The overnight call rate traded at 0.52/0.55 percent, data from money brokers Tokyo Tanshi and Central Tanshi showed.

REUTERS SZ VP0630