JGBs surge, 10-year yield falls from 7-mth high

By Rika Otsuka

TOKYO, May 9 (Reuters) - Japanese government bonds surged on Friday, with the benchmark 10-year yield dropping sharply from a seven-month high as investors rushed to buy paper at higher yield levels after putting a poor 10-year debt sale behind them.

On Thursday, buying emerged following the weak auction, confirming solid demand and prompting many market players to shift funds into JGBs.

Bond buying further gathered momentum on Friday, helped by falling stocks and overnight gains in U.S. Treasuries.

"Investors are buying as they figured that bond yields had limited scope for a further rise after seeing the market hanging in there despite a weak auction," said Atsushi Ito, JGB strategist at Morgan Stanley.

"Today's rally gives the impression that investor bond buying is fairly strong," he said. June 10-year futures climbed 1.06 points to 136.86, before easing to 136.68 2JGBv1, up 0.88 on the day.

The benchmark 10-year yield fell 7.5 basis points to 1.565 percent JP10YTN=JBTC, well off a seven-month high of 1.680 percent struck this week.

The five-year yield was down 7 basis points at 1.110 percent JP5YTN=JBTC.

The Nikkei share average .N225 fell 0.8 percent.

Thursday's auction of 1.9 trillion yen ($18.3 billion) in 10-year JGBs with a 1.7 percent couponwas this week's focal point, as it took place just two weeks after JGB futures suffered their biggest one-day sell-off in five years.

The auction produced a tail of 0.26, the widest since a 10-year JGB auction in September 2006.

The wide tail, an indication of weak demand, likely reflected caution among brokerage houses, which have been hit by turmoil in credit markets and the recent volatility in JGBs, traders and analysts said.

(Editing by Brent Kininmont)

($1=103.75 yen)