JGBs climb as market turmoil hits hedge funds

By Eric Burroughs

TOKYO, March 10 (Reuters) - Japanese government bonds jumped on Monday and the five-year yield hit a 2-1/2-year low on spreading turmoil in global credit markets that has sent investors and hedge funds scrambling to unwind losing positions.

JGBs were underpinned by U.S. jobs data last week showing companies cutting workers for a second straight month, which boosted Treasuries and knocked stocks lower. The Nikkei share average .N225 lost nearly 2 percent on Monday.

But analysts said the troubles in credit markets had caused repercussions in the JGB market by throwing historical relationships between futures, cash bonds and other securities out of whack, forcing players to bail out of bad bets.

The fallout has driven yen swap spreads out sharply to all-time highs and also pushed Japan's benchmark credit derivatives index, the iTraxx CJ, to record peaks.

The iTraxx CJ <ITXCK5JA=GFI>, a gauge of how much the credit market troubles are impacting Japan, widened 15 basis points to 185 basis points and has surged by 60 basis points in the past week.

"The market has just been too quick for anyone to react. I think a lot of people are still sitting on losses," said Freddy Lim, an interest rate strategist at Morgan Stanley in Tokyo. "Futures keep rallying against everything else."

At the start of the afternoon session, March futures were up 0.35 point at 139.40 2JGBv1, not far from the 2-1/2-year peak of 139.50 struck on Friday.

The benchmark 10-year yield <JP10YTN=JBTC> dipped 1.5 basis points to 1.335 percent. The five-year yield <JP5YTN=JBTC> dropped 2 basis points to 0.720 percent, the lowest since September 2005.