JGBs tumble as Treasury drop hits supply-wary mkt

* Futures post biggest one-day drop since October 2008

* Midterm JGBs underperform on heavy selling by banks

* 5-yr/20-yr yield spread tightens, curve could bear flatten

By Shinichi Saoshiro and Chikafumi Hodo

TOKYO, Dec 8 (BestGrowthStock) – Japanese government bonds tumbled on
Wednesday, with futures marking their biggest one-day drop since
October 2008, as a slide in U.S. Treasuries hit a market bruised
after a weak 30-year auction and wary ahead of a five-year sale.

The sharp drop in Treasuries, after a proposed extension of
tax cuts boosted economic optimism while stirring concerns over
inflation and the massive debt burden in the United States, hit a
JGB market short on confidence after the previous day’s tepid
30-year offering.

The decline in Treasuries sparked a sell-off of midterm JGBs
by domestic banks, recently seen selling longer-dated debt to
help offset losses from foreign bond holdings.

“The United States is now being associated with a debt burden
as well, while gains in stocks diminish hopes for extra monetary
easing. Government debt does not look good under such conditions
and investors are dumping it,” said a fund manager at a domestic
asset management firm.

Fading prospects for further Bank of Japan easing could
reverse the recent steepening of the yield curve by initiating a
bear flattening phase, analysts said.

Bear flattening occurs when shorter dated debt yields rise
faster than those on longer dated debt.

The five-year/20-year yield spread tightened by 4 basis
points to 157.5 basis points, pulling away from Tuesday’s 6-