JGBs rise as sell-off draws bargain hunters

By Chikako Mogi

TOKYO, May 1 (Reuters) - Japanese government bonds rose on Thursday, extending a rally from the previous day as the prospect for the Bank of Japan to keep interest rates steady for some time triggered more short covering.

Investors were seen buying cash bonds across the curve as the sharp sell-off from late last week drew bargain hunters, with yields having risen to levels that offered good value in light of expectations for steady interest rates.

The JGB market was also buoyed by the Federal Reserve leaving the door open to more rate cuts after trimming them by a quarter point on Wednesday. "There are a lot of investors buying cash bonds, with some probably resuming their purchases for the new business year, as the market had fallen so much," said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.

"Few appear to have positions to unwind now after the recent sell-off. Expectations for the BOJ to keep rates steady for some time and this week's weak Japanese and U.S. data are helping to bring the market's focus back to downside risks to growth," she said.

But she said that technically, the market had not fully recovered from the past few days' losses.

June 10-year futures 2JGBv1 jumped as much as 0.66 point to a high of 136.81 and ended the morning session up 0.48 point at 136.63, still below Thursday's low of 137.05 before the heavy selling started on Friday.

But trading volumes remained light, reflecting that the market was being easily whipped around as activity thins around Japan's Golden Week holidays. After a one-day break on Tuesday, Japanese markets will be closed again on Monday and Tuesday.

The lead futures contract posted the biggest one-day drop in five years on rising expectations of an eventual BOJ rate hike, with speculation the Fed would soon end its aggressive rate cut cycle, with the European Central Bank remaining vigilant over inflation.