JGBs tumble on Treasuries sell-off after Fed cut

TOKYO, Sept 21 (Reuters) - Japanese government bond futures tumbled to a five-week low on Friday, tracking this week's sell-off in U.S. Treasuries after the Federal Reserve's aggressive half-point interest rate cut fanned worries about inflation. Some analysts said the slide in JGBs may be exacerbated as domestic investors become reluctant to step into the market while they prepare to close their books on the first half of the country's financial year at the end of the month.

Long-term Treasury yields have soared as the Fed's rate slash, combined with a surge in oil prices to record peaks and the dollar's tumble to a record low against the euro, has stirred fears that inflation will accelerate in the United States.

"This is mainly because of the reaction to the Fed rate cut," said Kenro Kawano, interest-rate strategist at Credit Suisse. "The rise in inflation expectations is a global one. It's not good news for long-term yields."

JGBs have been at the mercy of the moves in Treasuries as investors and the Bank of Japan look for signs of how much the credit market crunch will hurt U.S. growth and have a knock-on impact on the domestic economy.

December 10-year futures (2JGBv1: Quote, Profile, Research) plunged 0.86 point to 134.44, the lowest since mid-August.

The benchmark 10-year yield jumped 7.5 basis points to 1.700 percent, a five-week high and up 16 basis points this week.

Two-year yields climbed 2.5 basis points to 0.830 percent, lagging the spike in long-term rates as the yield curve steepened further.

The market was also smarting in the wake of a weak auction of 20-year bonds the previous day that left dealers saddled with more of the issue than they had wanted.

Japanese shares fell on Friday, but the rebound along with other global equity markets following the Fed action has also prompted investors to see more risk of the BOJ possibly raising rates again before the year is out. The Nikkei share average slipped 0.6 percent to 16,338 (.N225: Quote, Profile, Research) but was up 1.2 percent for the week.

Some analysts said foreign investors were likely needing to sell JGBs after having been huge buyers of yen bonds in August when the money market strains in the United States and Europe sparked a flight to safe-haven government bonds.

Data on Thursday from the Japan Securities Dealers Association showed foreign investors bought a net 3.8370 trillion yen ($33.1 billion) of bonds in August, even as Japanese city banks, insurers and agricultural institutions were