July 9, 2018 / 3:19 AM / 8 months ago

UPDATE 2-Japan a big seller of German, U.S. bonds in May

* Japanese investors make biggest sales of German bonds in year

* Political crisis in Italy presents selling cue

* Japanese investors bought Spanish debt in May (adds comments, graphic)

By Hideyuki Sano

TOKYO, July 9 (Reuters) - Japanese investors sold a large amount of German and U.S. bonds in May to take advantage of a rally in the debt after investors sought safe havens from political instability in Italy, data from the Ministry of Finance showed on Monday.

They sold a net 712.1 billion yen ($6.45 billion) of German bonds in May, their largest net sales in more than a year, and a net 2.071 trillion yen ($18.76 billion) of U.S. bonds, the largest in three months.

They also sold 157.1 billion yen ($1.42 billion) of French bonds.

U.S. and core euro zone bond prices jumped in late May as investors put on safety bids after Italy looked like it was heading for an early election because political parties were struggling to form a government.

Italian bond prices plunged, lifting the two-year yield to a five-year high around 2.8 percent. The yield had been below zero percent earlier in the month.

The 10-year U.S. Treasuries yield fell to near 2.75 percent by the end of May from a seven-year high of 3.128 percent in mid-May.

The 10-year German bund yield dropped to one-year low of 0.19 percent in late May from around 0.65 percent in mid-May.

That provided Japanese investors with a cue to sell into the U.S. and German rallies, especially as the bonds had been under pressure from market expectations of monetary policy tightening by the Federal Reserve and the European Central Bank.

Japanese investors sold a net 85.4 billion yen of Italian bonds in May, the data showed, after buying 169.1 billion yen worth in April - their biggest purchase in two years.

But some Japanese investors also saw the spike in Italian bond yields as a good chance for bargain-hunting.

The bond pressure subsided after a new government was formed in Rome.

In a sign that their risk appetite was not complete damaged, the data showed Japanese investors bought 38.7 billion yen of Spanish bonds after their record net buying of 349.9 billion yen in April.

For Japanese investors, European bonds remained attractive because of their returns after currency hedges. From late last year to early 2017, they shifted about 6 trillion yen of funds to euro zone debt from the United States.

“I expect Japanese investors to continue to prefer euro zone bonds for the time,” said Hiroko Iwaki, senior strategist at Mizuho Securities.

Investors also bought 397.1 billion yen of British bonds, their biggest purchase since April 2016. ($1=110.40 yen, 1 euro=129.72 yen)

Reporting by Hideyuki Sano Editing by Shri Navaratnam and Neil Fullick

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