Japanese selling of foreign bonds hits record last week amid US jitters

By Dominic Lau and Hideyuki Sano

TOKYO, Oct 10 (Reuters) - Japanese investors sold a record amount of foreign bonds on a net basis last week, offloading nearly $23 billion worth, amid concerns over whether U.S. lawmakers would reach a deal to raise the federal debt limit by mid-October and avoid a historic default.

Japanese investors sold a net 2.226 trillion yen ($22.9 billion) in foreign bonds in the week through Oct. 5, Ministry of Finance data released on Thursday showed.

That was the largest amount since the ministry began collecting the data in 2005, and ended three straight weeks of net buying totalling 1.77 trillion yen.

With pressure rising and no clear path forward for breaking their fiscal impasse, President Barack Obama launched a series of White House meetings with lawmakers on Wednesday to search for a way to end a government shutdown and raise the borrowing limit by Oct. 17.

If a deal is not reached by the deadline, the U.S. could default on its debt, an outcome that is unthinkable for the global economy.

"It's probable that some of the Japanese money got out of Treasuries," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.

Japanese investors, including banks, pension funds and life insurance companies, had 40 percent of their debt holdings in U.S.-denominated bonds as of the end of 2012. Analysts say a large chunk of them are in U.S. Treasuries.

Yields on benchmark 10-year U.S. Treasuries hit their highest closing level in two weeks on Wednesday at 2.661 percent. Yields move inversely to prices.

By contrast, the 10-year Japanese government bond yield stood at 0.655 percent, near a five-month low of 0.625 percent touched last week.

Tomoaki Shishido, a fixed-income analyst at Nomura Securities, said the large selling by Japanese investors might have had more to do with booking Treasuries-related losses in the first half of Japan's financial year, than with the U.S. government shutdown.

The 10-year U.S. Treasury yield rose 76.3 basis points from the end of March to Sept. 30.

"That probably reflected selling for the half-year book closing at the end of September. Japanese investors typically do some operations for accounting purposes at the end of March and September," Shishido said.

"I don't think there is panic selling among Japanese investors. Some people are selling the bonds that have interest payments during later October to mid-November but most are essentially stuck with what they've got," he added.

Foreign investors also turned net sellers in Japanese equities, with 27.1 billion yen of outflows last week, after fourth straight weeks of buying.