JGB futures fall from 17-mth peak as stocks rebound

TOKYO, Aug 20 (Reuters) Japanese government bonds fell on Monday, with 10-year futures pulling back from a 17-month high as the Federal Reserve's surprise cut in its discount rate soothed investor nerves and helping equity markets bounce back.

The Fed's cut in the rate for banks borrowing funds from the central bank helped alleviate fears of a deteriorating squeeze in credit markets that had sparked a sell-off in risky assets such as stocks and higher-yielding currencies.

The Nikkei share average jumped more than 3 percent in early trade, clawing up from a one-year low hit on Friday when it suffered its biggest one-day drop since just after the Sept. 11 attacks.

Analysts said it was far from clear whether the Fed's action would be enough to calm the market storm caused by the U.S.

subprime mortgage crisis that has strained credit markets and even how banks lend short-term funds to each other.

Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities, said the Fed's action was seen as a first step and what the U.S. central bank does at its next meeting in September could impact what the Bank of Japan does next month.

Over the weekend Japanese newspapers reported that the BOJ was unlikely to raise interest rates at a policy meeting this week after the Fed's move and with financial markets still unsettled.

''While more market participants believe the Fed will cut the fed funds rate, it is unlikely the BOJ will raise rates at the same time,'' Hasegawa said.

September 10-year futures fell 0.49 point to 135.78 pulling back from the 17-month peak of 136.31 struck on Friday, when the lead contract posted its biggest one-day gain in nearly four years.

The benchmark 10-year yield climbed 3 basis points to 1.605 percent.

The Fed cut the discount rate 50 basis points to 5.75 percent and said in a statement that downside risks to growth had increased ''appreciably'', stoking expectations that a rate cut is coming at its next policy meeting in September.

Even though Japan has had little exposure to the U.S.

mortgage market woes, the sell-off in the Nikkei and a sharp rally in the yen had squashed expectations for a BOJ move at its two-day policy meeting ending on Thursday.

Swap contracts on the overnight call rate were showing a 15 percent chance of a rate increase this week and roughly 50 percent chance of a move in September, according to data from interdealer broker Meitan Tradition Just a few weeks ago the BOJ had been widely expected to raise rates to a decade high 0.75 percent this month from the current 0.5 percent.

Reuters CS VP0655