JGBs little changed, 10-year yield near 7-mth high

By Rika Otsuka

TOKYO, May 8 (Reuters) - Japanese government bonds were little changed on Thursday, with the benchmark 10-year yield hovering near a seven-month high, as investors retreated to the sidelines due to a closely watched 10-year debt auction.

JGBs rose in early trade as investors took their cue from a fall in share prices and an overnight rally in U.S. Treasuries.

But the market soon gave up most of its gains, pressured by dealer hedge-selling against the Ministry of Finance's 1.9 trillion yen ($18.2 billion) sale of benchmark 10-year bonds.

The auction is seen as a gauge of demand for government debt about two weeks after JGB futures suffered their steepest one-day drop in five years.

"Market participants do not have a clear sense of where the benchmark yield's fair level should be at the moment," said Katsutoshi Inadome, fixed-income strategist at Mitsubishi UFJ Securities.

"Today's auction is drawing a lot of attention as people need to see the results and moves in the secondary market after the sale to decide where the benchmark yield should be," Inadome said.

June 10-year futures were up 0.06 point at 135.53 2JGBv1.

The lead contract struck five-year peaks around 142.00 in mid-March then plunged to near 134.50 late last month as expectations for a rate cut by the Bank of Japan receded, with some even switching their sights towards an eventual BOJ rate rise.

The yield on the current 291st 10-year bond was unchanged on the day at 1.665 percent JP10YTN=JBTC. The benchmark yield hit a seven-month high of 1.680 percent on Wednesday.

The Nikkei share average .N225 fell 0.9 percent .N225, retreating from a four-month closing high posted the previous day.

The coupon for the new 10-year JGB was set at 1.7 percent, up from 1.3 percent at last month's auction of the same maturity and the highest since 1.7 percent at a 10-year auction in November 2007.

A higher yield is expected to attract demand from investors who look at absolute yield levels, such as life insurers and pension funds. But many are worried that other investors will stay reluctant to buy as a bond sell-off in the past few weeks has cooled demand for JGBs.

Poor auction results reflecting weak investor demand would likely spark more bond selling, analysts said. The MOF will announce the results at 0345 GMT.

Yields on two and five-year notes dipped 0.5 basis point each to 0.750 percent JP2YTN=JBTC and 1.190 percent JP5YTN=JBTC, respectively.

The 20-year yield rose 0.5 basis point to 2.250 percent JP20YTN=JBTC.

U.S. Treasuries rallied on Wednesday as a surge in crude oil prices CLc1 to record highs above $123 per barrel exacerbated fears about economic weakness, hurting stocks and reviving Treasuries' "safe haven" appeal. ($1=104.66 Yen) (Editing by Chris Gallagher)