Japanese government bonds rally on weak U.S. data, recover from sell-off

TOKYO (Reuters) - Japanese government bond prices rallied on Wednesday after manufacturing activity in the United States shrank to its lowest in more than a decade, suggesting central banks may need to ease policy further to bolster global growth.

The sharp increase in prices on Wednesday helped bond futures and cash bonds recoup some of the losses from the previous session after a poorly-received auction of the 10-year government debt triggered a sell-off.

The Bank of Japan has been sending signals that it could ease policy further by pushing down short- and medium-term yields but still allow the yield curve to steepen at the longer end, which discouraged purchases at Tuesday's auction.

Central banks around the world have embarked on a wave of monetary easing due to downside risks posed by the U.S.-China trade war.

Benchmark 10-year JGB futures rose 0.36 point to 154.50, with a trading volume of 16,888 lots. On Tuesday 10-year futures slumped by 0.88 point, the biggest decline since the BOJ introduced its yield curve control framework in September 2016.

The 10-year JGB yield fell 2.5 basis points to minus 0.165% on Wednesday, pulling back from a more than two-month high reached on Tuesday.

The 20-year JGB yield fell 2 basis points to 0.225%, while the 30-year JGB yield fell 1 basis point to 0.395%.

The five-year yield fell 2.5 basis points to minus 0.320%.

At the short end of the curve, two-year JGB yields fell 0.5 basis point to minus 0.300%, retreating from a two-week high set on Tuesday.

The spread between five-year and 30-year debt widened slightly on Wednesday to 71.3 basis points, while the spread between five-year and 10-year debt widened to 15.9 basis points.

(Reporting by the Tokyo Markets Team)