Ten-yr JGB yield hits 3-mth high as Europe crisis deepens
* Profit-taking keeps weighing on JGBs
* Euro-yen 3-mth rate futures at 8-mth low on funding stress abroad
* Bargain hunters emerge after 10-yr JGB futures hit 4-mth low
* Sentiment in JGB market worsens sharply to 3-wk low
By Akiko Takeda
TOKYO, Nov 28 (Reuters) - Japanese government bonds fell on Monday as a rise in yields on euro-zone debt pressures investors to take profits from JGBs and prepare for expected losses in risk assets.
But they recouped some losses as bargain hunters emerged in cash bonds with maturities over 10 years after the benchmark yield hit a three-month high.
"There aren't many alternatives other than JGBs when it comes to sheltering money. When foreigners' position squaring run its course, I expect more buyers to emerge," said a trader at a Japanese bank.
December 10-year JGB futures fell a four-month low of 141.71 in early morning trade but trimmed their losses. They closed at 141.87, 0.42 point lower.
A Reuters weekly survey showed on Monday that sentiment in the JGB market worsening sharply to the lowest in three weeks, but the median forecast was for the 10-year JGB yield to go no higher than 1.050 percent by the end of this week, as market participants expect bargain hunting by cash-rich investors at higher yields.
While the debt crisis in Europe has unnerved investors and despite Japan's public debt burden being twice the size of its GDP, many doubt JGBs will fall victim to the vicious cycle of investors selling and further erosion of confidence witnessed in the euro zone, because JGBs are mostly financed by domestic investors.
"A poor German bond auction last week fuelled fears that the euro-zone debt crisis could get out of control, and this is still weighing on JGBs, but investors are just adjusting positions ... I don't think their selling is based on a perception that JGBs are falling into the same category as those facing the debt mess in the euro zone," said a fund manager at Japanese asset management firm.
The 10-year JGB yield was up 3 basis points at 1.055 percent after hitting 1.065 percent, its highest since Sept. 2.
Three-month euro-yen interest rate futures were down 0.5 basis point at 99.635, a fresh eight-month low as rates at the short-end of yield curve could climb because London interbank offered rates (LIBOR) are facing upward pressure on euro zone woes.
JGBs' reaction was subdued after Moody's Investors Service warned on Monday that the rapid escalation of the euro-zone sovereign debt and banking crisis threatens the credit standing of all European government bond ratings.
The Nikkei average climbed 1.6 percent on Monday as strong U.S. retail sales over the Thanksgiving weekend and a report that the International Monetary Fund was considering support for Italy set off a wave of short-covering.
A report in Italian newspaper La Stampa suggested the IMF was preparing a rescue plan worth up to 600 billion euros ($796 billion) for Italy, more than the fund can currently provide on its own.
A source with knowledge of the matter told Reuters that contact between the IMF and Rome had intensified but added it was unclear what form of support could be offered if a market sell-off on Monday forced immediate action. Official sources in Rome said they were unaware of any request for assistance from Italy.
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