JGBs edge up as investors stick to cautious footing

By Eric Burroughs

TOKYO, March 21 (Reuters) - Japanese government bonds edged up on Friday despite gains in Tokyo shares, as investors stuck to a cautious footing in safe-haven debt after a volatile week fuelled by the collapse of investment bank Bear Stearns.

The volatility has also led to market anomalies, like negative long-term swap spreads, as foreign hedge funds and other market players have been forced to unwind a variety of positions that have soured on them.

The unwinding of positions has sent futures swinging sharply in both directions, soaring to a five-year high earlier in the week. Intraday moves had been more than a full point in each of the first three days of the week.

But JGBs have given back some of their gains as stocks have rebounded on a flurry of initiatives from the Federal Reserve to calm markets, including helping JPMorgan Chase take over Bear Stearns and slashing rates down to 2.25 percent.

JGB strategists at ABN AMRO say futures have outperformed cash bonds, partly because many of these flows tied to bad positions or hedging needs have been concentrated in the lead contract.

"JGB yields have been dragged lower with futures rallying, but with little domestic buying so far," they said in a note to clients.

Analysts have said that the market volatility has been exacerbated by Japanese banks and financial institutions shying away from trading before the fiscal year wraps up next week. Japanese financial markets reopened after a holiday, but activity was subdued with many financial centres from Australia to Singapore closed for the Easter break. Markets in Europe and the United States will also be closed.

June 10-year futures 2JGBv1 drifted up 0.02 point to 141.26 but remained off the five-year peak of 142.00 struck in Monday's evening session.