JGB futures inch up on Treasuries, auction weighs

TOKYO, Aug 28 (Reuters) Japanese government bond futures inched higher on Tuesday, tracking a rally in U.S. Treasuries the previous session, but cash bonds were weighed down by selling ahead of a 20-year bond offer.

The Ministry of Finance offered 800 billion yen (.87 billion) in 20-year JGBs, with a 2.1 percent coupon, down from 2.3 percent at last month's sale of the maturity.

JGB yields fell to multi-month lows over the past couple of weeks as concerns about a deterioration in global credit markets prompted investors to dump risky assets and seek the safety of government bonds.

''The market is getting some support from the rise in Treasuries but caution ahead of the auction is weighing on sentiment,'' said Koji Ochiai, a senior market analyst at Mizuho Securities.

''The expected drop in the coupon makes it difficult for investors such as life insurers to buy, and demand for the new issue will likely be tepid,'' he said.

Traders said the market's downside was expected to be limited due to reallocation needs from large bond redemptions next month and the month-end extension of main benchmark indexes such as the Nomura BPI.

September 10-year futures were up 0.05 point at 135.49, well below the 18-month peak of 136.46 hit a week ago.

Benchmark 10-year yields were flat at 1.615 percent, while five-year yields were also unchanged at 1.170 percent.

The 20-year yield rose 1 basis point to 2.090 percent.

U.S. Treasuries rallied on Monday, supported by more evidence of a weak U.S. housing market and lingering concerns about liquidity in credit markets.

The pace of U.S. existing-home sales slipped slightly in July, though it was above analysts' expectations.

Supply of unsold single-family homes reached its highest level since 1991, raising concerns the weakness in the housing sector may slow the U.S. economy even more.

Traders were awaiting a speech at the end of the week by Federal Reserve Chairman Ben Bernanke, who will discuss housing and monetary policy.

While keeping an eye on overseas developments, JGBs traders were also closely monitoring speeches by BOJ board members this week for clues on the BOJ's future monetary policy, after the Japanese central bank kept interest rates unchanged last week.

Expectations for a September rate hike remain but whether the BOJ could boost rates or not depends on the decisions by the European Central Bank and the Fed, both of which hold policy meetings before the BOJ, traders said.

BOJ Deputy Governor Toshiro Muto is scheduled to speak to a forum in Beijing on Japan-China economic cooperation on Tuesday.

BOJ board member Atsushi Mizuno, who was the only board member to vote against the central bank's decision to keep interest rates on hold at 0.5 percent at last week's policy meeting, will speak on Thursday.

Swap contracts on the overnight call rate show investors see around 45 percent chance of a BOJ rate hike in September and about 55 percent chance of a hike in October.

Reuters RKM VP0725