JGBs extend rally, 10-yr yield well off 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.

Pension funds aggressively picked up 10-year bonds, as well as recently battered five-year notes, while hedge funds bought futures, traders said.

"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 136.78 2JGBv1, up 0.98 on the day.

The benchmark 10-year yield fell 8.5 basis points to 1.555 percent <JP10YTN=JBTC>, well off a seven-month high of 1.680 percent struck this week.

The five-year yield was down 7.5 basis points at 1.105 percent <JP5YTN=JBTC>.