JGB 10-year yield hits 7-mth high in nervous trade

By Rika Otsuka

TOKYO, May 16 (Reuters) - The benchmark 10-year Japanese government bond yield climbed to a seven-month high on Friday as nervous investors dumped government debt after a disappointing Bank of Japan buying operation.

The move started as traders looked to sell some seven- to 10-year paper to the BOJ in its regular "rinban" operation to buy 300 billion yen ($2.9 billion) in JGBs outright. But they were unable to do so as others sold notes with shorter maturities in an unexpectedly large amount.

When the central bank could not take on the bonds, traders sold them in the cash market, prompting other jittery investors to dump JGBs too.

"The results of the JGB buying operation showed how much traders wanted to get rid of their bond holdings," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

JGBs initially drew support from the previous day's gains in Treasuries and a better-than-expected five-year debt auction that soothed some fears about poor investor demand after the market sell-off over the past two months.

But with many market players badly burnt by the bond slump since the start of Japan's new financial year in April, the JGB market remains fragile without a powerful buyer, analysts and traders said.

"It is dangerous to buy bonds in the current market," said a trader at a big Japanese bank.

"Given the recent high volatility in the market, the risk that market players can take in their bond holdings has decreased and such conditions may not improve much for a while," he said.