JGBs tumble as Treasuries hit by Fannie, Freddie takeover

* JGB futures hit as Treasuries slide on Freddie, Fannie

* Anomalies remain in futures before contract roll-over

* Futures volume remains relatively light, exacerbating moves

* Doubts of fast recovery in growth, financials support JGBs

By Chikako Mogi

TOKYO, Sept 8 (Reuters) - Japanese government bonds tumbled on Monday on a slide in U.S. Treasuries, as the U.S. government's takeover of mortgage giants Fannie Mae and Freddie Mac pushed stocks sharply higher and dampened investors' appetite for safe-haven bonds.

The takeover of the U.S. finance companies is the latest move by Washington to shore up the slumping housing market and was taken to ward off more global financial market turbulence. [ID:nN07479172] [ID:nN07463067]

Benchmark 10-year Treasury yields rose as high as 3.900 percent in Asia trading on Monday, up 19 basis points from 3.708 percent in late U.S. trade on Friday. [US/]

The rescue plan sent U.S. stock index futures soaring, and the Nikkei average .N225 jumped 3.6 percent at one point after closing up 3.4 percent on Monday, posting its biggest percentage gain in five months.

"The initial reaction to the U.S. government takeover of the mortgage companies is to sell JGBs, pushing yields higher," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.

September 10-year futures 2JGBv1 tumbled as low as 136.94, down 1.74 points on the day, before ending the day session at 137.32, 1.36 points lower and posting the biggest one-day drop since late April. They hit a five-month peak of 139.09 on Friday.

Despite the big price action, trading volume in the lead contract stayed below Thursday's 63,771 contracts, a four-month high.

Market players remained wary of the uncertain outlook in the futures market, which has seen volatile swings over the past few weeks, with traders citing commodity trading advisers, or CTAs, and other hedge funds as behind the swings.

The key 10-year yield jumped as much as 9 basis points to a one-month high of 1.550 percent, before easing to 1.525 percent, up 6.5 basis points on the day, and moving away from a four-month low of 1.400 percent hit late in August.

Despite the selling pressure, investors were scooping up cash bonds on dips as investors believe it will still take time before the U.S. housing market recovers, the economy regains strength and the financial system is stabilised.

Cash bond yields rose across the board, helping to revive investor appetite for the bonds at current yield levels, particularly the five-year sector ahead of Tuesday's auction.

The Ministry of Finance will offer 1.9 trillion yen ($17.43 billion) in five-year JGBs.

With five-year yields rising as much as 11.5 basis points to 1.145 percent , the coupon was likely to be set at 1.1 percent, up from 1.0 percent at last month's sale of the maturity, raising expectations for a smooth auction.

"The five-year sector looks relatively cheap compared with futures, and also slightly cheap along the yield curve," said Akihiko Inoue, a market analyst at Mizuho Investors Securities.

FUTURES STAY VOLATILE

Kenro Kawano, a senior interest-rate strategist at Credit Suisse, said selling provided an opportunity for some correction to anomalies created over the past few weeks and would help the JGB yield curve normalise after the seven-year yield fell below that of the five-year yield last week.

While the tumble may reduce the relative expense of futures compared to the cash market, any correction may be less evident in the cash market as uncertainty remains ahead of the roll-over of the lead contract due on Wednesday.

Futures had soared on speculative trades that bet on a sustained rally as global economies deteriorate, and the futures-driven surge had resulted in the negative 5-7 year spread, analysts said.

Futures have also been distorted by ongoing tightness in the No.276 10-year bond, which is expected to be used in the December futures settlement as the contract switches to December from September on Wednesday.

The spread between the September and December contract turned negative on Monday due to the unusually strong demand for the December contract, traders said. The low liquidity in the No.276 10-year bond would exacerbate moves. ($1=109.01 Yen)