JGB futures hit 1-month high as Treasuries rally

TOKYO, Oct 18 (Reuters) Japanese government bond futures struck a one-month high on Thursday after U.S. Treasuries rallied the previous day as economic reports raised expectations for a Federal Reserve interest rate cut.

Treasuries rose on Wednesday after news that U.S. home construction starts fell 10.2 percent last month to their lowest level in more than 14 years, while the Fed's Beige Book snapshot of regional economies reinforced the argument for an easier monetary policy.

That somewhat pushed back expectations that the Bank of Japan will raise interest rates in December or early next year.

Investors now see a roughly 60 percent chance of the BOJ raising rates in December, down from around 70 percent on Wednesday, according to swap contracts on the overnight call rate They see a 75 percent chance of a hike by January, down from around 80 percent the previous day.

''JGBs are higher as expectations for a Fed rate cut in October have been reheated,'' said Makoto Yamashita, chief JGB strategist at Lehman Brothers in Tokyo.

''If the U.S. central bank lowers interest rates this month, it would prompt investors to believe the BOJ will be unable to raise interest rates this year,'' Yamashita said.

U.S. short-term rate futures showed a nearly 60 percent chance the Fed would ease rates at its Oct. 30-31 meeting. The central bank lowered the benchmark federal funds rate by an aggressive 50 basis points to 4.75 percent last month.

December 10-year futures edged up 0.05 point to 135.41 after climbing as high as 135.54, the highest since Sept. 20.

The benchmark 10-year yield dipped 0.5 basis point to 1.640 percent, after striking a fresh one-month low of 1.635 percent in early trade.

The yield has fallen more than 10 basis points from a two-month high of 1.745 percent hit last week.

The five-year yield slipped 0.5 basis point to 1.160 percent after going as low as 1.155 percent, a one-month low.

REUTERS CS BST0645