July 5, 2017 / 6:35 AM / 18 days ago

JGB futures hit 3 1/2-mth lows as selling mounts on short bonds

3 Min Read

TOKYO, July 5 (Reuters) - Japanese government bonds slid on Wednesday as weak results of the Bank of Japan's bond operation weighed on a market already under pressure from expectations that some of the world's major central banks are moving to tighten monetary policy.

The benchmark 10-year JGB futures price slipped 0.17 point to 149.98, closing at the lowest level since mid-March. Trading volume hit 30,835 lots, about 50 percent above the average so far this year.

The yield on the benchmark 10-year JGB rose 1.0 basis point to 0.085 percent , matching a 3 1/2-month high touched last week.

The BOJ's purchase of 280 billion yen ($2.47 billion) JGBs with one- to three-years left to maturity attracted selling of 1.162 trillion yen, the biggest amount for the buying in those maturities since May 24.

The accepted rates were also higher than market expectations.

"There appear to be some people who couldn't sell the bonds to the BOJ and are saddled with long positions," said a trader at a Japanese brokerage.

As a result, the two-year yield rose 1.0 basis point to minus 0.120 percent. The five-year yield rose 1.0 basis point to minus 0.060 percent.

Both yields are not far from what traders see as the BOJ's defence line, or the levels at which the BOJ offered to buy an unlimited amount in November, namely minus 0.09 percent in the two-year yield and minus 0.04 percent in the five-year yield.

Few market players are eager to test the BOJ's resolve at present, but further increases in U.S. and European bond yields could prompt the Japanese market to test those levels again, some market players said.

Yields on U.S. and European bonds have risen sharply over the past week after policymakers at the European Central Bank, the Bank of England and the Bank of Canada all signalled they could tighten their policies.

The 20-year yield rose 0.5 basis point to 0.600 percent , while the 30-year yield ticked up 1.0 basis point to 0.865 percent ahead of Thursday's 30-year JGB auction. ($1 = 113.19 yen) (Reporting by Hideyuki Sano; Editing by Biju Dwarakanath)

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