JGB futures erase gains on data after short-covering

By Satomi Noguchi

TOKYO, May 16 (Reuters) - Japanese government bond futures edged down towards a seven-month low on Friday, erasing earlier gains as strong growth data discouraged market players from continuing to cover short positions after this week's plunge.

JGBs initially drew support from the previous day's gains in Treasuries and a better-than-expected five-year debt auction that soothed some fears about poor investor demand after the market sell-off over the past two months.

But with many market players badly burnt by the bond slump since the start of Japan's new financial year in April, a recovery in JGBs looked fragile without a powerful buyer, analysts and traders said.

"It is dangerous to buy bonds in the current market," said a trader at a big Japanese bank.

"Given the recent high volatility in the market, the risk that market players can take in their bond holdings has decreased and such conditions may not improve much for a while," he said.

June 10-year JGB futures edged down 0.03 point to 135.12 2JGBv1, giving up earlier gains to 135.58 and falling back towards a seven-month low of 134.28 hit earlier this week.

On Wednesday, the lead contract had tumbled nearly two full points at one stage in a near repeat of a sell-off late last month when futures posted their biggest one-day loss in five years.

Japan's economy grew 0.8 percent in January-March from the previous quarter, beating market expectations for a 0.6 percent increase, Friday's data showed. [ID:nTKU003275]