JGBs little changed, 40-yr auction results in focus

*JGBs sit tight as investors await 40-year debt sale results

*MOF's 200 billion yen auction of 40-year bonds expected to draw solid demand

By Rika Otsuka

TOKYO, May 13 (Reuters) - Japanese government bonds were little changed on Tuesday as investors retreated to the sidelines to await the results of a 40-year debt auction.

The mood was supported after Bank of Japan Governor Masaaki Shirakawa on Monday confirmed the central bank's neutral stance on interest rates. The BOJ dropped its bias towards raising rates last month.

Shirakawa said that while the BOJ would raise rates if uncertainties over the economy cleared, it would be appropriate to keep them on hold or even cut them if the economy were hurt by rising energy prices. [ID:nTKF003146]

"Many investors are willing to buy JGBs. It's just that they do not want to be the first one to do so after seeing such an unstable market," said Mari Iwashita, senior market economist at Daiwa Securities SMBC.

Investors need to pick up bonds to replace many JGBs scheduled to be redeemed next month, analysts said. JGBs with durations of five years or longer mature in March, June, September and December.

June 10-year futures were up 0.01 point at 136.26 2JGBv1.

In late April, JGB futures posted their biggest one-day drop in five years as expectations for a BOJ interest rate cut receded, with some investors even shifting their sights towards an eventual rate hike.

The benchmark 10-year yield edged up 0.5 basis points to 1.590 percent JP10YTN=JBTC, staying below a seven-month high of 1.680 percent struck last week.

The market's focal point on Tuesday is Japan's second 40-year bond auction. The Finance Ministry will sell 200 billion yen ($1.9 billion) of 40-year debt in a reopening of the current No. 1 issue offered in November. The coupon will be set at 2.4 percent.

Given a rise in super-long bond yields since the last offer, Tuesday's auction is expected to meet solid demand from long-term investors, such as life insurers.

Still, many market participants watched the debt sale nervously as investors have been cautious about buying at auctions in the past month due to the unusually high volatility in JGBs.

Open interest in lead JGB futures has slumped to a near three-year low due to the volatility. Open interest totalled 90,666 in June futures as of Monday. With the exception of rollover periods, that is the lowest since late September 2005, according to the Tokyo Stock Exchange.

Reflecting thinning volume in the JGB market, the MOF's data showed on Monday that foreign investors sold a hefty 859 billion yen of Japanese bonds in the week ended May 3. Click on [JP/CAP]

The two-year yield was up 1 basis point at 0.745 percent JP2YTN=JBTC, while the five-year yield rose 1 basis point to 1.160 percent JP5YTN=JBTC.

The 20-year yield was flat at 2.200 percent JP20YTN=JBTC, while the 30-year yield dipped 0.5 basis point to 2.435 percent JP30YTN=JBTC.

Swap contracts on the overnight call rate show investors see a nearly 40 percent chance of the BOJ boosting rates by the end of the year JPONIBOJ=TRDT having priced in a 70 percent chance of a rate rise in late April. (Editing by Hugh Lawson)