JGBs fall after BOJ's tankan beats expectations

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TOKYO, Oct 1 (Reuters) Japanese government bonds fell on Monday after the Bank of Japan's tankan survey of corporate sentiment beat forecasts, keeping alive expectations that the central bank could boost interest rates in coming months.

Japanese companies' business sentiment remained resilient in September despite global market turmoil and fears of a U.S.

slowdown, with the tankan showing a headline diffusion index for big manufacturers' sentiment of plus 23, above the forecast of plus 22.

The tankan also showed big firms expect their capital spending to rise 8.7 percent in the current fiscal year ending next March, above a 7.5 percent rise forecast and also up from the 7.7 percent increase seen in the previous survey in June.

''Despite negative factors, such as the market turmoil, the survey's result was strong, underscoring the strength in corporate activities,'' said Koji Ochiai, senior market analyst at Mizuho Securities.

''The survey keeps alive the possibility of a rate hike before the end of the year. Since the market hasn't fully factored in a near-term BOJ rate hike, it will depend on whether the central bank will start sending messages to offer clues on the timing,'' he said.

December 10-year JGB futures were down 0.08 point at 134.86, after opening down 0.19 point at 134.75 March euroyen futures slipped to 99.105 from 99.115 in early trading.

The 10-year JGB yield rose 1.5 basis points to 1.690 percent Traders said investors were likely to refrain from taking big positions ahead of a 10-year note auction on Tuesday, the first JGB auction for the second half of the fiscal year which began on Monday.

The Ministry of Finance will offer 1.9 trillion yen ( billion) in 10-year JGBs on Tuesday, with traders expecting a 1.7 percent coupon, unchanged from last month's offer of the maturity.

Swap contracts on the overnight call rate showed investors see a roughly 55 percent chance of the BOJ raising rates to 0.75 percent from the current 0.5 percent in December, little changed from last week The next BOJ policy-board meeting is slated for Oct. 10-11, followed by another one on Oct. 31, when the central bank releases its semi-annual outlook on prices and the economy.

The central bank has kept interest rates on hold after raising the key policy rate to 0.5 percent in February, which was the first rate hike since July last year.

Reuters MP VP0716

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