Japanese government bonds reigned supreme in the global fixed-income markets in May, while securities issued by the United States and Europe lagged behind, according to the latest global bond report from J.P. Morgan Securities.

J.P. Morgan's Government Bond Index Monitor said the Japanese bond market was the top performer for the second straight month with a return of 1.20% during May.

With Japan's economy "bouncing along the bottom," the report said, the Bank of Japan has guided short-term interest rates toward record lows, resisting further strengthening of the yen, while bolstering the banking systems and supporting economic recovery.

Inflation continued to recede in Japan in May with producer prices declining and consumer prices less than 1% above year-ago levels, the report said.

The U.S. government securities market lost ground in May as investors remained jittery about inflation despite increases in both the federal funds and discount rates, Morgan said.

The Treasury market lost 0.6% in May as job growth caused investor worries that the Federal Reserve might not be able to contain inflation.

European bond markets continued to fall in price in May, Morgan said, losing 1.75% in the past month. This year, the trend in European fixed- income markets has been toward higher intermediate and long-term yields despite continued monetary easing, the report said.

Although European bond markets rallied briefly on the most recent Fed rate increases, they sold off sharply in late May on signs of economic recovery and concerns that monetary easing in Germany and elsewhere in Europe was nearing an end. Investors in European bonds were cautions regarding prospects for future rate declines, leading to liquidation at the long end of most markets to limit losses, Morgan said.

German bonds, the leading Europeans performer, lost 0.66% in May despite surprise 50 basis-point reductions in the discount and repo rates, Morgan said, predicting that the Bundesbank may ease more cautiously this summer.

In May, the second best performer in Europe was Spain, posting a bond market loss of 0.71%, Morgan said. Corruption scandals and political turmoil pushed rates on the 10-year benchmark as high as 9.8% at times.

United Kingdom gilt prices lost 3.7% in May and were the worst performers in all of the reported debt markets, Morgan said. Gilt yields have risen by more than 2% since the beginning of the year, a sign of deterioration in expectations for inflation, Morgan said. Gilts have posted double-digit losses of 11.29% for the year to date.

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