JGBs extend losses to fourth day, 10-year yield hits 1-year high
* Futures post biggest 4-day fall since Oct 2008
* Japanese banks sell JGBs after market turns volatile
* 5-year yield hits 2-year high ahead of Thursday auction
* Debate on Fed's QE exit exacerbates selling
TOKYO, May 15 (Reuters) - Japanese government bond prices fell for the fourth straight session on Wednesday, with the 10-year bond yield hitting a one-year high, as investors reassess their long-held assumptions of low growth and low inflation in Japan.
A huge spike in market volatility since the Bank of Japan introduced massive easing last month has heightened worries among banks' risk managers, forcing them to advise traders to cut their exposure to the market.
"I feel it will be difficult to calm down the market and bring down volatility. Many investors have already suffered losses and they would want to sell into a rally," said a trader at a Japanese bank.
The 10-year JGB futures price fell 0.22 point to 141.89 , extending their losses since Thursday to 2.87 point, the biggest four-day fall since October 2008.
Japanese banks, which have been stepping up bond buying for many years due to lack of borrowers, are dumping JGBs as Japanese share prices surged and the yen fell as a result of Prime Minister Shinzo Abe's reflationary policy, which aims to lift inflation to two percent in roughly two years.
The Nikkei share average hit a 5-1/2-year high on Wednesday while the yen slid to a 4-1/2-year low versus the dollar.
A rise in U.S. bond yields on mounting speculation the Federal Reserve may scale back its bond buying programme exacerbated the selling in JGBs.
In response to the unrelenting tide of selling and in order sooth market sentiment, the BOJ offered to inject two trillion yen of cash on top of regular offer of 800 billion yen but its impact did not last long.
The yield on the 10-year cash bonds rose as high as 0.920 percent, its highest level in over a year and in late trade it stood at 0.865 percent, up one basis point.
The five-year bond yield hit a two-year high of 0.455 percent before stepping back to 0.415 percent, still up 2.0 basis points from the previous day.
Market players expect further bumps ahead, after the BOJ's aggressive easing policy in April has boosted market volatility significantly.
The BOJ pledged in April to buy 7.5 trillion yen JGBs a month, or about 70 percent of the new offer to the market, for two years. Market players say the massive buying could drive investors out of the market and make it unstable.
"There's the underlying fact that the BOJ's massive bond buying is drying up market liquidity, and making the market volatile," said Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.
Bond investors had been long sceptical of the prospects of higher inflation, but a sharp fall in the yen, beyond the psychological support of 100 per dollar last week, pushed some investors to shift funds out of bonds.
The sell-off could subside possibly after the five-year JGB auction on Thursday, some market players said.
"I think we'll see selling climax in a couple of days. The target is one percent in 10-year yield and 0.5 percent in the five-year yield," said Takeo Okuhara, fund manager at Daiwa SB Investments.
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