JGBs fall, frenetic safe-haven buying levels off

By Masayuki Kitano

TOKYO, March 25 (Reuters) - Japanese government bond futures fell on Tuesday, pulling away from last week's five-year highs, after U.S. Treasuries slid on tentative hopes for a recovery in the U.S. housing sector and credit markets.

JGB futures soared last week after JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz) agreed to acquire ailing U.S. investment bank Bear Stearns BSC.N, in a deal that was initially seen as highlighting the depth of the damage caused by tumult in U.S. credit markets.

But JGB futures have since trimmed their gains due to a recovery in U.S. and Japanese share prices from last week's lows, said Naomi Hasegawa, senior fixed-income strategist for Mitsubishi UFJ Securities.

"There are growing hopes in the United States for further measures," Hasegawa said, referring to possible steps by U.S. authorities to help troubled credit markets.

June 10-year JGB futures fell 0.34 point to 140.31 2JGBv1, pulling away from a five-year peak of 142.00 hit in night session trading last week.

The benchmark 10-year JGB yield rose 1 basis point to 1.265 percent <JP10YTN=JBTC>, staying above a three-year low of 1.230 percent hit last Monday.

Price swings in JGB futures have become more moderate after a jump in volatility last week, when hedge funds and other market players rushed to unwind positions that had soured, causing market anomalies such as negative long-term swap spreads.

Normally, swap rates are higher than government bond yields because of the counterparty risk involved in derivative contracts, especially in the current shaky environment when investors fret about the credit risk of financial firms.