JGB futures hit 7-mth low as investors dump bonds

By Satomi Noguchi

TOKYO, May 23 (Reuters) - Japanese government bond futures hit a seven-month low on Friday as more investors shed their exposure to the debt on nervousness that high volatility in the market could further hurt their books.

Futures fell more than a full point to extend the previous day's sharp slide as growing expectations the Federal Reserve may have to raise interest rates to fight rising price pressures has hurt U.S. Treasuries, and so too Japanese bonds.

JGBs were vulnerable as investors worried about the mounting inflation threat from surging oil prices, which hit a record high above $135 a barrel this week.

The benchmark 10-year yield jumped to a seven-month high with domestic investors such as big Japanese banks rushing to cut holdings on a perception that a further market slide was likely.

"The amount of risk that investors such as banks could take with their bond holdings decreased as the market breached new lows, probably prompting them to dump bonds," said a chief fund manager at a Japanese asset management firm.

June 10-year futures 2JGBv1 tumbled 1.21 points to 134.21, the lowest since October.

The benchmark 10-year yield JP10YTN=JBTC climbed 8 basis points to 1.735 percent, a seven-month high.

The five-year yield JP5YTN=JBTC jumped 9.5 basis points to 1.300 percent, in sight of a nine-month high of 1.320 percent struck last week.

The fund manager said dumping of the cash government bonds by banks may have been triggered by sell signals from value-at-risk (VaR) models.

JGBs had pushed higher earlier this week as speculators covered short positions on the tumble in futures to seven-month lows last week, while some portfolio managers shifted funds into a market that had been battered by two months of severe volatility.

But hopes for market stability faded after another disappointing Bank of Japan buying operation on Thursday highlighted how difficult it can be for market players to get rid of bond holdings, sparking a sharp fall.

Some analysts said the drop in JGBs could be halted, with investors still guessing how oil's surge might hobble consumer spending and corporate profits, keeping expectations in tact that the BOJ will sit tight for some months before eventually raising rates.

"The 10-year JGB yield has the potential to rise as high as 1.75 percent, but it won't stay at such high levels for long without solid expectations for a near-term BOJ rate rise," said a fixed-income analyst at a Japanese securities firm.

Minutes of the BOJ's April 8-9 meeting showed on Friday that policy board members agreed that downside risks to the global economy are heightening in light of unstable international financial markets and a flagging U.S. economy. [ID:nTKU003295]

The two-year yield JP2YTN=JBTC rose 4 basis points to 0.830 percent while the 20-year yield edged up 2 basis points to 2.310 percent JP20YTN=JBTC.

(Editing by Brent Kininmont)