JGBs extend losses after Friday's sell-off

By Chikako Mogi

TOKYO, April 28 (Reuters) - Japanese government bonds extended losses on Monday, with the benchmark 10-year yield rising to a fresh six-month high after a sell-off late last week, while players were sidelined before a string of holidays.

The rise in overseas yields on inflation concerns and receding fears about a global credit market crisis have prompted investors to tighten their risk management on portfolio allocations, making them very cautious about buying bonds even if yields may have risen to reasonable levels, analysts said.

But investors are eventually likely to return to the market given the huge jump in yields, as the Bank of Japan is expected to keep interest rates steady at the current 0.5 percent for several months while Japan's economy remains sluggish.

"Investors with a large portfolio are likely to have tightened risk management given the rise in global yields, and while massive one-sided selling likely peaked last week, it will take some time to see the selling subside," said Atsushi Ito, fixed income strategist at Morgan Stanley.

Traders said banks, which had been active buyers of medium-term sectors in February and March, were likely to have shed much of these holdings during the latest sell-off, and selling pressure was likely to ease.

Regional banks were seen buying bonds, attracted by the rise in yields, but their buying was overshadowed by much larger lots sold by bigger banks, a trader at a Japanese bank said.

Big banks were likely to have been behind the selling of 10-year bonds on Monday, the trader added.

Institutional investors such as life insurers and pension funds, which allocate funds regularly each month, are expected to lend support to the super-long maturities, particularly with these yields currently offering very attractive returns, analysts said.