JGB futures slump from 5-year highs as stocks rebound

By Chikako Mogi

TOKYO, March 18 (Reuters) - Japanese government bond futures slumped from five-year highs on Tuesday as a recovery in Tokyo share prices prompted players to book profits after a sharp rise over the past week.

JGB futures staged their biggest one-day rise since September 2003 on Monday as the takeover of Bear Stearns and the Federal Reserve's latest emergency steps failed to relieve investor concerns over the broadening U.S. credit market troubles.

A near 4-percent plunge in Tokyo shares and the dollar falling to a 13-year low against the yen on Monday also put pressure on foreign players and hedge funds to continue unwinding bad bets on curve-flattening positions, which weighed on super-long maturities.

The gains in JGBs were almost entirely driven by futures, led by trend-following hedge funds and funds betting on the macroeconomic outlook, while Japanese investors remained cautious ahead of the March 31 fiscal year-end bookclosing.

The Japanese government has nominated Koji Tanami, a former top finance ministry bureaucrat, as its second nominee to become the next Bank of Japan governor before Toshihiko Fukui retires on Wednesday. But a senior opposition lawmaker warned the surprise choice was likely to be vetoed. [ID:nT282293]

Analysts have said the political tussle over the BOJ has not been a major factor for bond investors because they do not expect a vacancy at the top of the central bank, at least not for very long, during a time of such financial market turmoil.

"Activity usually slows around this time of the year and Japanese investors refrain from aggressively buying, so the sharp market moves are most likely related to the unwinding of positions and need to cut losses on bad bets," said Mari Iwashita, senior strategist at Daiwa Securities SMBC.

With the benchmark yield falling to its lowest level in three years, and shorter maturities hovering around levels that could only be justified by a Bank of Japan interest rate cut, JGBs may look appealing to those seeking to book profits on any assets to cover losses from the stock market plunge or credit products.

"A sharp decline in Tokyo share prices will likely prompt investors to take profits wherever they can," Iwashita said.

June 10-year futures 2JGBv1 ended the morning down a half a point on the day at 141.20, after hitting a fresh five-year high of 142.00 in the evening session on Monday. During the day session, they rose as much as 1.46 point on the day.

The benchmark 10-year yield JP10YTN=JBTC rose 3.5 basis points to 1.300 percent, rising from a low of 1.230 percent hit on Monday, which was its lowest since July 2005.

Super-long yields fell as the pressure to unwind bad curve-flattening bets eased with the stock market recovery.

The 30-year yield fell 2 basis points to 2.530 percent, after soaring 15 basis points on Monday. The 20-year yield fell 3 basis points to 2.155 percent after jumping 11 basis points on Monday.

The benchmark Nikkei average .N225 ended the morning session up 1.46 percent on Tuesday, a day after falling 3.71 percent to end at 11,787.51, its lowest finish since August 2005.

JGB losses came despite a jump in U.S. Treasuries overnight on expectations the Fed will slash interest rates aggressively at its policy meeting later this session.

"The JGB market is undergoing a correction from an overshoot triggered by massive position unwinding the previous session," said Chotaro Morita, chief strategist at Barclays Capital, adding that players were sidelined before the Fed decision.

After cutting its discount rate and launching a new discount lending facility for primary dealers, the Fed is now seen likely to slash benchmark rates by an unusually aggressive 1 percentage point on Tuesday to 2 percent.

The Ministry of Finance's auction of 800 billion yen ($8.22 billion) of 20-year JGBs this session was expected to draw lukewarm demand.

While yield levels may be appealing for some investors, securities firms -- battered by the volatile financial markets -- may not bid strongly at the auction, traders said. ($1=97.27 Yen) (Reporting by Chikako Mogi; editing by Gary Crosse)