JGB futures tumble as Treasuries add to mkt nerves

By Satomi Noguchi

TOKYO, May 23 (Reuters) - Japanese government bond futures tumbled on Friday, hit by losses in U.S. Treasuries while investors remained nervous about the shaky state of the market after another sharp slide the previous day and cut their exposure to the debt.

Futures have given up all the gains made earlier this week and were down further as investors moved quickly to book profits and worried about the mounting inflation threat from surging oil prices, which hit a record high above $135 a barrel this week.

Growing expectations the Federal Reserve may have to raise interest rates to fight price pressures has hurt U.S. Treasuries, pushing the benchmark 10-year JGB yield to a fresh seven-month high.

"It is negative for the market that the U.S. Treasuries market has started to shift rather abruptly from a firm footing to corrective trade," said Tetsuya Miura, a bond strategist at Shinko Securities, in a note to clients.

June 10-year futures 2JGBv1 fell by as much as 1.03 point to 134.39 earlier in the session, in sight of a seven-month low of 134.28, before recovering to 134.59 2JGBv1, down 0.83 point on the day.

The benchmark 10-year yield JP10YTN=JBTC climbed 5.5 basis points to 1.710 percent after jumping as much as 8 basis points at one stage to 1.735 percent, the highest since October.

JGBs had pushed higher earlier this week as speculators covered short positions in the tumble in futures to seven-month lows last week, while some portfolio managers shifted funds into a market that has 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, which sparked a sharp fall the previous day.

Analysts said the drop in JGBs could be halted, with investors still guessing how oil's surge could hobble global growth by hurting consumer spending and corporate profits, keeping expectations in tact that the Bank of Japan will sit tight for some months before eventually raising rates.

BOJ 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, minutes of their April 8-9 meeting showed on Friday. [ID:nTKU003295]

The five-year yield JP5YTN=JBTC rose 6.5 basis points to 1.270 percent, heading towards a nine-month high of 1.320 percent struck last week.

The two-year yield JP2YTN=JBTC edged up 4 basis points to 0.830 percent. (Editing by Michael Watson)