JGB futures slip on Nikkei, caution before auction

By Satomi Noguchi

TOKYO, May 15 (Reuters) - Japanese government bond futures fell on Thursday, extending sharp losses suffered the previous day, as Tokyo shares gained and investors fretted before an auction of recently battered five-year notes.

JGBs briefly trimmed losses after data showed Japan's core machinery orders fell more than expected in March and a weak forecast for orders in the April-June quarter kept concerns intact that the domestic economy will deteriorate on flagging capital spending. [ID:nT285678]

But this lift was fleeting as market players became increasingly nervous about the outcome of a five-year auction later in the session, a day after the market experienced a near repeat of a sell-off late last month when futures posted their biggest one-day loss in five years.

"Everyone is watching how much investors are willing to buy the new issue after sell-offs in the past two months," said Maki Shimizu, a JGB strategist at UBS Securities Japan.

June 10-year JGB futures fell 0.21 point to 134.76 2JGBv1 after dipping as low as 134.63.

On Wednesday, the lead contract had tumbled nearly two full points at one stage to a seven-month low of 134.28.

The benchmark 10-year yield rose 3.5 basis points to 1.705 percent JP10YTN=JBTC, matching a seven-month high struck on Wednesday.

The Finance Ministry offered 1.9 trillion yen ($18 billion) in five-year debt with a 1.3 percent coupon as expected, up 50 basis points from the issue auctioned last month and the highest since the October issue. The results are due out at 0345 GMT.

Japanese banks, historically the main investors in the midterm sector, have dumped five-year notes aggressively as they have been badly burnt by the bond slump since the start of the new fiscal year in April.

"The 1.3 coupon looks very attractive, given a view that the Bank of Japan is unlikely to raise rates soon," said a senior trader at a Japanese bank.

"But it is hard to imagine someone being brave enough to buy bonds just after the market went through a surprise tumble and many banks have been hurt by that," the trader added.

The yield of the current No. 70 five-year note rose 3 basis points to 1.310 percent JP5YTN=JBTC, near a nine-month high of 1.320 percent struck the previous session.

The hefty loss in JGBs in late April came amid a growing view that the worst of the credit market turmoil might be over and as expectations receded for the Bank of Japan to cut interest rates, with some investors shifting their sights to an eventual rate rise.

Traders said Wednesday's JGB sell-off was largely due to technical selling by banks and traders who sold the bonds to hedge against the five-year debt auction.

The two-year yield was up 3.5 basis points at 0.845 percent JP2YTN=JBTC, while the 20-year yield edged up 2.5 basis points to 2.250 percent JP20YTN=JBTC. ($1=105.01 yen) (Editing by Chris Gallagher)