JGBs rise after Nikkei reverses gains, Fed eyed

* JGB 10-year yield hits 2-1/2-mth low as Nikkei slips

* JGB futures hit highest in over a month

* Persisting concerns on economy help JGB demand

TOKYO, June 24 - Japanese government bonds rose on Wednesday, sending the benchmark yield to its lowest in 2-½ months after Tokyo share prices reversed gains.

Investors keenly awaited the outcome of the Federal Reserve's policy meeting later in the day and how financial markets in the United States would react to it, dealers said.

"Domestic investors in the JGB market have been cautious about the economic outlook even when global stocks were on an uptrend. But since the rise in stocks peaked the view on the economy has been shifting to what JGB market players have been holding," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.

The market was also supported by investor demand due to 10 trillion yen ($105 billion) of JGBs maturing in June, dealers said.

A rally in U.S. Treasury debt prices the previous day on a solid auction of two-year notes also lent support to the JGB market, they said.

Trade was generally subdued as investors braced for the Fed's policy decision later in the day and this week's remaining sales of five- and seven-year Treasury notes on Wednesday and Thursday.

"Trade generally lacked direction and investors do not seem to be building positions ahead of a slew of key economic events in the U.S. and Japan," said Keiko Onogi, a senior JGB strategist at Daiwa Securities SMBC.

The Ministry of Finance announced in April that it would sell an additional 16.9 trillion yen of JGBs for the fiscal year to March 2010 to finance the government's fiscal stimulus packages.

The increase begins with a two-year tender on Thursday, with the amount boosted to 2.4 trillion yen from 2 trillion yen.

The two-year auction is expected to draw solid demand from investors such as banks as the maturity benefits from the Bank of Japan's easy monetary policy and the market is focusing more on a 10-year auction to be held next week, market watchers said.

September 10-year futures edged up 0.08 point to 137.52, the highest since May 7.

The 10-year yield fell 1.5 basis points to 1.390 percent, its lowest since early April, after rising to 1.420 percent in early trade.

The benchmark 10-year JGB yield was on a downtrend since it struck an eight-month peak of 1.560 percent earlier in the month, pressured by a jump in Treasury yields and a stock market rally that pushed Tokyo's Nikkei average to an eight-month closing high above 10,000.

The 20-year yield declined 2.5 basis points to 2.065 percent.

The two-year yield edged down 0.5 basis point to 0.335 percent. A decline below 0.335 percent would mark its lowest point since February 2006.

The five-year yield was down 0.5 basis point to 0.745 percent, the lowest since March 25.

The Nikkei average edged down 0.1 percent by the end of morning trade, weighed down by wariness ahead of the Fed meeting. ($1=95.16 Yen)