JGB futures plunge on Treasuries, 5-yr auction eyed

By Rika Otsuka

TOKYO, May 14 (Reuters) - Japanese government bond futures plunged to a seven-month low on Wednesday, dragged down by an overnight fall in U.S. Treasuries, while investors nervously awaited Thursday's auction of recently battered five-year notes.

Treasuries fell on Tuesday after retail sales hinted that U.S. economic weakness might be less pronounced than some had thought, and after Federal Reserve officials sounded reluctant to cut interest rates further. [US/]

"The initial drop in JGB futures was due to losses in Treasuries," said Tatsuo Ichikawa, fixed-income strategist at ABN AMRO Securities. "But after that, futures could be pressured by hedge-selling against the five-year auction."

June 10-year JGB futures dropped as much as 1.83 points on the day to 134.28, their lowest since mid-October before recovering a tad to 134.44 2JGBv1, down 1.67 points.

The benchmark 10-year yield jumped 11.5 basis points to a seven-month high of 1.695 percent <JP10YTN=JBTC>.

Despite the sell-off, many market participants do not expect JGBs to extend losses sharply as the Bank of Japan is unlikely to raise interest rates from the current 0.5 percent soon. The central bank dropped its bias towards raising rates last month.

In addition, 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.

"JGB yields have risen to attractive levels," said a senior portfolio manager at a Japanese life insurance company. "The market is likely to bottom out sooner or later as investors will start buying. Nobody is expecting the benchmark yield to rise to 2 percent."  Continued...