JGB futures drop, investors rattled by market swings

By Eric Burroughs

TOKYO, March 21 (Reuters) - Japanese government bond futures dropped on Friday as Tokyo stocks posted gains, but many investors stuck to sidelines after a volatile week fuelled by the collapse of investment bank Bear Stearns.

The volatility has also led to market anomalies, such as negative long-term swap spreads, as foreign hedge funds and other market players have been forced to unwind a variety of positions that have soured on them.

The unwinding has sent futures swinging sharply in both directions, soaring to a five-year high earlier in the week. Intraday moves had been more than a full point in each of the first three days of the week.

"It's kind of a perfect storm for volatility," said the head of derivatives trading at a U.S. investment bank in Tokyo. "These are the most dysfunctional markets I've ever seen."

JGB futures have retreated on the rebound in stocks after a flurry of initiatives from the Federal Reserve to calm markets.

Those measures have included helping JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz) take over Bear Stearns BSC., offering direct lending to securities firms for the first time since the Great Depression and slashing rates down to 2.25 percent.

June 10-year futures 2JGBv1 fell 0.42 point to 140.82, off the five-year peak of 142.00 struck in Monday's evening session.

The Nikkei share average .N225 rose 1.1 percent and has clawed up 6 percent from a 2-1/2-year low hit earlier in the week.