JGBs rebound after Treasuries rally on jobless rise

By Masayuki Kitano

TOKYO, June 9 (Reuters) - Japanese government bond futures rose sharply on Monday after U.S. Treasuries rallied late last week as the U.S. jobless rate jumped to its highest in more than 3-½ years.

JGB futures rebounded after sliding on Friday, when the five-year JGB yield hit a 10-month high a day after the European Central Bank shocked markets by saying it may raise interest rates as soon as July.

JGBs have been hit by heavy selling in the past two months, and their weakness has been compounded in recent weeks as a surge in oil prices to record highs stokes concerns about inflation.

Although the weak U.S. jobs data raises concerns about the outlook for U.S. growth and knock-on effects on the Japanese economy, worries about inflation are unlikely to disappear, said Tatsuo Ichikawa, fixed-income strategist for ABN AMRO Securities.

"Rather than see the focus shift totally toward concerns about the economy and see bond yields head lower, I think what we have now is a more balanced situation," Ichikawa said.

JGBs are unlikely to rise too sharply in the near term, especially since dealers will likely try to sell on rallies to prepare for a five-year note auction on Tuesday, he said.

June 10-year JGB futures rose 0.74 point to 135.09 2JGBv1, recovering much of the losses they suffered on Friday when they slid 0.88 point.

The 10-year JGB yield fell 5 basis points to 1.735 JP10YTN=JBTC.

The five-year JGB yield fell 6 basis points to 1.300 percent JP5YTN=JBTC, pulling further away from a 10-month high of 1.395 percent struck on Friday.

The rebound in JGBs came as the benchmark Nikkei share average slid 2.6 percent .N225.

The U.S. unemployment rate surged to 5.5 percent in May, its highest in more than 3-½ years, as the barely growing economy lost jobs for the fifth straight month, data released on Friday showed. [ID:nN06467327]

The spike in the U.S. jobless rate helped trigger a rise in Treasuries, which also got a boost as a stock market sell-off deepened as crude oil spiked to new records around $139 per barrel. [US/]

JGBs have seen heavy selling over the past two months as stock markets rallied due to a growing perception that the worst of the global credit crisis may be over, causing a spike in JGB volatility that has crimped investor demand for bonds.

The slide in JGBs gained steam in late May as a surge in oil prices to record highs fuelled worries about inflation, although renewed worries about credit-market related losses at major financial institutions has been a source of some support.

The lead June JGB futures contract could draw some support in the near-term from possible buybacks ahead of an expected benchmark shift to the September contract in the next few days. (Reporting by Masayuki Kitano; Editing by Chris Gallagher)