JGBs drop as Fed acts to aid credit market strains

By Eric Burroughs

TOKYO, March 12 (Reuters) - Japanese government bonds slid on Wednesday and futures pulled back from a 2-1/2-year high as the Federal Reserve took new measures to alleviate the strains in credit markets, boosting stocks and hurting safe-haven debt.

JGBs retreated along with Treasuries after the Fed announced a new facility for providing funds to banks and relaunched liquidity agreements with major foreign central banks after the sharp deterioration in the $7 trillion U.S. mortgage bond market.

The latest Fed efforts to contain the fallout from the U.S. subprime mortgage crisis gave a shot of confidence to investors, even as analysts said the relief would likely be temporary after the benefits of similar efforts in December proved short-lived. [ID:nL11474708]

"In my opinion, the Fed's action to widen the collateral to private mortgage-backed securities is more supportive as compared with a big rate cut or the Term Auction Facility. But the market has learned from past experience," said Makoto Yamashita, chief JGB strategist at Lehman Brothers.

The Nikkei share average .N225 jumped 2.5 percent and had soared nearly 4 percent at one point. [.T]

The pull-back in JGBs also gave a reprieve to investors and hedge funds that have been battered in the past week by bad trades in the yen interest rate swap market and also in other securities like inflation-linked bonds.

As hedge funds and other players rushed to unwind those trades, futures soared higher and yen swap spreads were driven to the widest levels on record.

June 10-year futures 2JGBv1 slipped 0.13 point to 139.37, recovering from a low of 138.98. The lead contract reached a 2-1/2-year peak of 139.78 on Tuesday.