JGBs little changed, 40-year auction in focus

*JGBs sit tight as investors eye 40-year debt auction

*MOF selling 200 billion yen of 40-year bonds in a reopening of No.1 issue first offered in November

By Rika Otsuka

TOKYO, May 13 (Reuters) - Japanese government bonds were little changed on Tuesday as investors retreated to the sidelines to await a 40-year debt auction.

Sentiment was supported, however, a day after Bank of Japan Governor Masaaki Shirakawa confirmed the central bank's neutral stance on interest rates. The BOJ dropped its bias towards raising rates last month.

Shirakawa said that while the BOJ would raise rates if uncertainties over the economy cleared, it would be appropriate to keep rates on hold, or even cut them, if the economy were hurt by rising energy prices. [ID:nTKF003146]

"Many investors are willing to buy JGBs. It's just that they do not want to be the first one to do so after seeing such an unstable market," said Mari Iwashita, senior market economist at Daiwa Securities SMBC.

June 10-year futures were up 0.05 point at 136.30 2JGBv1.

JGB futures posted their biggest one-day drop in five years in late April as expectations for a BOJ interest rate cut receded, with some investors even shifting their sights towards an eventual rate hike.

The benchmark 10-year yield was unchanged on the day at 1.585 percent JP10YTN=JBTC, staying below a seven-month high of 1.680 percent struck last week.

The market's focal point on Tuesday is Japan's second ever 40-year bond auction. The Finance Ministry will sell 200 billion yen ($1.9 billion) of 40-year debt in a reopening of the current No. 1 issue offered in November. The coupon will be set at 2.4 percent.

The auction is expected to meet solid demand from long-term investors, such as life insurers.

Still, many market participants awaited the debt sale nervously, as investors were cautious buyers at auctions in the past month due to unusually high volatility in JGBs.

Open interest in lead JGB futures has slumped to a near three-year low due to high volatility in the market. Open interest totalled 90,666 in June futures as of Monday. With the exception of rollover periods, that is the lowest since late September 2005, according to the Tokyo Stock Exchange.

Reflecting thinning volume in the JGB market, the MOF's data showed on Monday that foreign investors sold a hefty 859 billion yen of Japanese bonds in the week ended May 3. Click on [JP/CAP] (Editing by Chris Gallagher)