JGBs rise on Greek debt worry, solid 10-year sale

A man takes a photo of displays showing market prices at the Tokyo Stock Exchange in Tokyo April 11, 2012.

TOKYO (Reuters) - Japanese government bond prices gained on Wednesday, with most yields skidding to new 19-month lows, after the previous day's solid 10-year auction and a flare-up of concern about Greece's debt crisis improved sentiment towards fixed-income assets.

Greece struggled to form a government after weekend elections cast the future of its austerity steps into doubt. If the country does not follow the pledges it made in exchange for a European Union/International Monetary Fund bailout, officials estimate it could run out of money as soon as next month.

A 10-year JGB sale on Tuesday with a 0.900 percent coupon met strong demand even with benchmark yields trading around 1-1/2 year lows.

A sell-off in risk assets contributed to the JGB rally. Japan's Nikkei average .N225 dropped 1.5 percent to a 3-month closing low.

"With stocks weakening and the yen strengthening, there are few investment choices for Japanese investors, so we keep buying JGBs. Even though our stomachs are full, we still have to keep eating," said a fixed-income fund manager at a Japanese trust bank.

The 10-year JGB yield fell 2 basis points to 0.845 percent, its lowest level since October 2010.

The 10-year JGB futures June contract added 0.17 point to close at 143.29, after hitting a session high of 143.33. That was its highest level since February 14, when futures spiked to 143.37 following the Bank of Japan's surprise announcement of additional monetary easing.

The central bank followed up with further easing steps at its April 27 meeting, at which it decided to expand JGB purchases by 10 trillion yen and extend the remaining maturity of JGBs to be purchased under its asset buying program to up to three years, from two years previously.

"If all the regular investors want to keep buying and the Bank of Japan is buying more, it is easy to see why yields are going down," said Neale Vincent, a strategist at Nomura Securities Co in Tokyo.

"A lot of investors are no longer waiting for pullbacks. In April there was decent investor selling throughout the month, in anticipation of prices coming off after the BOJ meeting, but, with the central bank buying more aggressively than expected, investors have, one by one, been throwing in the towel," he said.

The 20-year JGB yield shed 1 basis point to 1.640 percent, while the 30-year JGB yield dropped 1.5 basis point to 1.810 percent. Both of those levels were new 19-month lows.

The five-year JGB yield dropped 1.5 basis point to 0.240 percent, also its lowest level since October 2010.

"Many of what the BOJ lists as potential risks have already materialized. The global recovery is losing momentum, which is driving down bond yields and share prices," Atsushi Mizuno, former BOJ board member and currently an executive at Credit Suisse (CSGN.VX), told Reuters in an interview on Wednesday.

Mizuno said the BOJ should scrap its asset-buying program and boost government bond purchases more flexibly.

($1 = 79.771 Japanese yen)

(Editing by Jacqueline Wong)