JGB futures slump from 5-year highs as stocks rebound

By Chikako Mogi

TOKYO, March 18 (Reuters) - Japanese government bond futures slumped from five-year highs on Tuesday as a recovery in Tokyo share prices prompted players to book profits after a sharp rise over the past week.

JGB futures staged their biggest one-day rise since September 2003 on Monday as the takeover of Bear Stearns and the Federal Reserve's latest emergency steps failed to relieve investor concerns over the broadening U.S. credit market troubles.

A near 4-percent plunge in Tokyo shares and the dollar falling to a 13-year low against the yen on Monday also put pressure on foreign players and hedge funds to continue unwinding bad bets on curve-flattening positions, which weighed on super-long maturities.

The gains in JGBs were almost entirely driven by futures, led by trend-following hedge funds and funds betting on the macroeconomic outlook, while Japanese investors remained cautious ahead of the March 31 fiscal year-end bookclosing.

The Japanese government has nominated Koji Tanami, a former top finance ministry bureaucrat, as its second nominee to become the next Bank of Japan governor before Toshihiko Fukui retires on Wednesday. But a senior opposition lawmaker warned the surprise choice was likely to be vetoed. [ID:nT282293]

Analysts have said the political tussle over the BOJ has not been a major factor for bond investors because they do not expect a vacancy at the top of the central bank, at least not for very long, during a time of such financial market turmoil.

"Activity usually slows around this time of the year and Japanese investors refrain from aggressively buying, so the sharp market moves are most likely related to the unwinding of positions and need to cut losses on bad bets," said Mari Iwashita, senior strategist at Daiwa Securities SMBC.

With the benchmark yield falling to its lowest level in three years, and shorter maturities hovering around levels that could only be justified by a Bank of Japan interest rate cut, JGBs may look appealing to those seeking to book profits on any assets to cover losses from the stock market plunge or credit products.