CORRECTED-JGBs narrowly mixed after solid auction offset rise in stocks

Wed May 8, 2013 8:26pm EDT

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(Corrects date of 30-year bond auction in paragraph 7 to Tuesday, not Thursday)

* Solid result of re-offer auction help market pare losses

* Rally in Japanese/global shares undermining JGBs

* Some market players see risk of further rally in shares

By Hideyuki Sano

TOKYO, May 8 (Reuters) - Japanese government bonds were narrowly mixed on Wednesday, with a good auction result helping them pare early losses sparked by firmer share prices.

While the market has regained stability in recent weeks, with the 10-year cash bond yield sitting comfortably within its recent trading band, some market players worry further advances in stock prices could prompt investors to rotate out of JGBs and into equities.

The 10-year Japanese government bond yield rose 0.5 basis point to 0.595 percent, near the middle point of its 0.55-0.65 percent trading range since late April.

The price of 10-year JGB futures ended just 0.01 point down at 144.72, recovering from the day's low of 144.58.

JGBs cut losses following a solid, so-called liquidity-enhancing auction, in which the ministry re-offers previously issued 20- and 30-year bonds.

The announcement of the 30 billion yen ($3.03 billion) re-offering auction was delayed by one hour and 45 minutes due to technical troubles, though traders said the delay had no market impact.

The results boded well for a bigger auction on Tuesday -- of 500 billion yen ($5.05 billion) 30-year JGBs.

Before the auction, JGBs were softer as Japanese share prices hit a fresh five-year high on strong Chinese trade data and a further rally in Wall Street shares.

The strength in Tokyo shares helped to steepen the JGB yield curve slightly. The 20-year bond yield rose 1.5 basis point to 1.500 percent while the 30-year yield also rose as much to 1.635 percent.

Some market players think JGBs could lose more as rally in global and Japanese shares have shown few signs of abating.

"I'm bearish on JGBs," said Takeo Okuhara, a fund manager at Daiwa SB Investments. "Stocks are amazingly strong and I'm starting to feel the rally may not stop even if they rise too much."

In a sign investors are not expecting big gains in JGBs, they are selling call options, said an option trader at a Japanese brokerage.

"Many regional banks are selling calls with strike price of about 0.30 point above the current levels. They want to sell JGBs if the 10-year yield falls near its level just before the BOJ's easing announcement, around 0.555 percent," he added.

Still, the BOJ's massive bond buying plan announced last month is seen limiting losses in the market and some analysts say JGBs should eventually strengthen as the BOJ will gobble up more bonds from the market.

"As the BOJ is going to buy such a huge amount of bonds, and with market volatility falling, I expect JGB yields to gradually fall, to around 0.4 percent," said Yuya Yamashita, rates strategist at JPMorgan Chase.

The BOJ has committed itself to a two-year stimulus plan to buy 7.5 trillion yen bonds per month, making it the biggest single buyer of JGBs. (Reporting by Hideyuki Sano; Editing by Jacqueline Wong & Kim Coghill)

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