JGBs rise on Europe woes; 10-year yield hits 9-year low

TOKYO Wed May 30, 2012 9:41pm EDT

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TOKYO May 31 (Reuters) - Japanese government bonds rose on Thursday, pushing the benchmark yield to a 9-year low, as Europe's deepening credit problems and rising borrowing costs prompted investors to seek the safety of fixed-income assets.

* The benchmark 10-year JGB yield shed 2.5 basis points to 0.815 percent, after earlier dropping to 0.810 percent, its lowest level since July 2003.

* The 10-year JGB futures contract gained 0.27 point to 143.70 after rising as high as 143.82, the highest level for the front-month contract since October 2010.

* The five-year JGB yield dropped 1 basis point to 0.205 percent, after earlier touching a 19-month low of 0.200 percent.

* On Wednesday, Spanish 10-year yields rose above 6.7 percent, nearing the 7 percent level viewed as unsustainable, while yields on all German bond maturities hit record lows.

* JGB yields were also pressured by rising U.S. debt prices, with the yield on the benchmark 10-year U.S. Treasury note slipping to 1.611 percent from 1.619 percent in late U.S. trading.

Benchmark Treasury yields are now wallowing at their lowest level in at least 60 years.

* "This rally appears overdone, both in JGBs and Treasuries, but with so many uncertainties in Europe, it's difficult to sell bonds. Foreign investors who sold JGBs on Friday are buying them back, and pension funds appear to be buying as well," said a fund manager at a Japanese trust bank in Tokyo.

"There is nothing to do but buy flatteners," he added, for investors hesitant to buy with yields so low who want to bet that the yield curve will continue to flatten as longer maturities outperform.

* The bull-flattening continued on Thursday, with the superlong sector gaining most.

Investors such as insurance companies often buy longer-term assets at the end of a month, to extend the duration of their portfolios.

* The 30-year bond yield fell 3 basis points to 1.765 percent, while the yield on the 20-year bond also fell 3 basis points to 1.610 percent.

* JGB auctions in coming weeks will be a test of demand, to gauge investors' appetite for bonds if yields stay around current low levels.

The finance ministry will offer 10- and 30-year JGBs next week, followed by 5- and 20-year bonds the week after that.

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