JGB futures up on short-covering after tumble

By Satomi Noguchi

TOKYO, May 19 (Reuters) - Japanese government bond futures climbed on Monday, pulling away from a seven-month low in thin trade as dealers covered short positions after a tumble late last week.

Analysts said a sharp slide late on Friday looked overdone, prompting some investors to pick up the debt, though cautiously.

The market remained unstable however after volatile sessions last week and most investors stayed on the slidelines, leaving few JGB buyers in the market, analysts said.

"The market gained a sense that the fall on Friday was too much," said Maki Shimizu, a JGB strategist at UBS Securities Japan.

June 10-year futures rose 0.52 point to 135.23 2JGBv1 and were up as much as 0.55 point at one stage at 135.26, rebounding from a seven-month low of 134.28 hit last week.

The benchmark 10-year yield fell 3 basis points to 1.665 percent JP10YTN=JBTC.

On Friday, the 10-year yield climbed to a seven-month high of 1.710 percent as investors dumped government bonds after a disappointing Bank of Japan buying operation, which highlighted how much traders wanted to get rid of their bond holdings.

JGBs drew some support on Monday from data that showed Japanese manufacturers turned pessimistic about business conditions for the first time in five years in May as high raw material prices and a U.S. slowdown eroded sentiment.

The Reuters tankan, a monthly survey of leading Japanese firms that tracks the BOJ's influential corporate survey, produced an index of minus 2 for manufacturers, down from plus 1 in April. [ID:nTKG003086]

The BOJ holds a policy-setting meeting on Monday and Tuesday, in which it is widely seen leaving interest rates unchanged.

The market is eager to hear what BOJ Governor Masaaki Shirakawa has to say at the post-meeting news conference about rising prices in food and commodities and their impact on the economy.

The central bank shifted to a neutral stance on rates at the end of April, dropping its previous bias towards raising rates, and saying downside risks to the economy would likely dominate in the near term.

The five-year yield dropped 3.5 basis points to 1.245 percent JP5YTN=JBTC, off a nine-month high of 1.320 percent struck last week.

The 20-year yield was down 1.5 basis points at 2.250 percent JP20YTN=JBTC.

(Editing by Brent Kininmont)