JGB futures plunge on Treasuries, 5-yr auction eyed

By Rika Otsuka

TOKYO, May 14 (Reuters) - Japanese government bond futures plunged on Wednesday, dragged down by an overnight fall in U.S. Treasuries, while investors nervously awaited Thursday's auction of recently battered five-year notes.

Treasuries fell on Tuesday after retail sales hinted that U.S. economic weakness might be less pronounced than some had thought, and after Federal Reserve officials sounded reluctant to cut interest rates further. [US/]

"The initial drop in JGB futures was due to losses in Treasuries," said Tatsuo Ichikawa, fixed-income strategist at ABN AMRO Securities. "But after that, futures could be pressured by hedge-selling against the five-year auction."

June 10-year futures fell 1.40 points on the day to 134.71 2JGBv1.

The benchmark 10-year yield jumped 8.5 basis points to 1.665 percent JP10YTN=JBTC, climbing towards a seven-month high of 1.680 percent struck last week.

In late April, JGB futures posted their biggest one-day drop in five years as expectations for a Bank of Japan interest rate cut receded, with some investors shifting their sights to an eventual rate rise.

The Finance Ministry's five-year debt sale on Thursday is seen as an important gauge of investor demand after the sell-offs in the past two months. Japanese banks, historically the main investors in the mid-term sector, have dumped five-year notes aggressively as they were badly burnt by the bond slump.

The five-year yield was up 8 basis points at 1.260 percent JP5YTN=JBTC.

Government data showed on Wednesday that Japan's annual wholesale inflation in April rose 3.7 percent from a year earlier, a little more than expected and rekindling worries that higher oil and other raw material prices could take a toll on the country's economic growth. JPCGPY=ECI

(Editing by Brent Kininmont)