JGBs rise on deteriorating credit markets

By Chikako Mogi

TOKYO, March 11 (Reuters) - Japanese government bond futures hit a fresh 2-1/2-year high on Tuesday, as deteriorating global credit markets prompted investors and hedge funds to keep unwinding losing positions.

JGB futures also took their cue from a jump in U.S. Treasuries overnight and falling Tokyo shares as signs of damage from the credit market turmoil spreading to private equity helped drive investors' bids for safe-haven debt.

Futures wiped out earlier gains to end the morning session slightly lower as the Nikkei share average .N225 recovered from losses to close the morning up 0.14 percent.

Fears of deepening credit problems were renewed by speculation in the market that Bear Stearns BSC.N was facing a liquidity crunch, which the company denied. [ID:nN10462988]

Investors looking to get out of losing bets continued to unwind leveraged positions, and in the JGB market that involved liquidating positions involving selling futures against interest-rate swaps and also selling regular JGBs against inflation-linked bonds.

Reflecting intensifying credit worries, yen swap spreads had widened sharply over the past couple of sessions. The five-year yen swap spread was steady around 41 basis points <JPYSB6L5Y=TKFX> after having surged about 8 basis points on Friday alone.

Position adjustments driven by foreign players were likely to come full circle in coming sessions, reducing volatility in the market, traders said.

Even so, yields were likely to remain under downward pressure as a preference for safe haven investments will stay in place given mounting signs that the U.S. economy has fallen into a recession, weighing on the Japanese economy, they said.