Despite worries about Japan's mounting government debt, thehighest as a percent of GDP of any of the Group of Seven industrial countries, investors are reluctant to bale out and post losses before closing their books for the fiscal year on March 31, they said. Sluggish bank borrowing by Japanese corporations, preoccupiedwith cutting heavy debt levels and shedding excess plant and equipment, will also leave banks with little choice but to funnel their excess liquidity into the bond market.

The yield on the benchmark 10-year cash bond closed above 1.8percent for the first time in two months on Wednesday, but market watchers expect it to hover in a well-trodden range of 1.6 percent to 1.9 percent in the near term."Bond futures prices have fallen sharply, but I don'T expecta freefall as investors are interested in hunting for bargains in cash bonds.

The chances of the benchmark bond yield rising to two percent have receded for now," a fund manager at a major city bank said. Masuhisa Kobayashi, fixed income strategist at Merrill LynchJapan, added: "Sentiment is neither overly pessimistic nor overly optimistic now.

"The yield on the last-issued 10-year cash bond edged up to1.885 percent on Friday morning, its highest since late November, but later eased to 1.810 percent in late afternoon trade. It traded as low as 1.660 percent on January 28.

-- (Reuters)