Japan's Bond Yield Curve Steepens On Higher Oil Prices, Inflation Concerns

TOKYO, April 30 (Reuters) - Japan's government bond yield curve steepened on Thursday, with the benchmark 10-year yield hitting a 29-year high, as reports of U.S. military action to end the Iran stalemate drove oil to a four-year high and fuelled inflation concerns.

The benchmark 10-year JGB yield JP10YTN=JBTC rose 5.5 basis points to 2.515%, the highest since June 1997. The 20-year JGB yield JP20YTN=JBTC and the 30-year yield JP30YTN=JBTC climbed 9 bps to 3.395% and 3.730%, respectively.

The yield on the 40-year JGB JP40YTN=JBTC, Japan's longest tenor, rose 11.5 bps to 3.98%. Yields move inversely to bond prices.

"Higher oil prices and the risk of further deterioration in the situation around the Strait of Hormuz are weighing on the market, leading to stronger selling pressure in the long end of the bond market," said Ryutaro Kimura, fixed-income strategist at BNP Paribas Asset Management.

"It raises the risk of further price increases, and judging by global market scenarios as well, the current move is likely to heighten inflation concerns," he said, adding the Bank of Japan's reluctance to signal a near-term rate hike has also reinforced pressure on yields at the long end.

The Japanese central bank kept its policy rate steady at this week's meeting.

Brent crude futures for Juneadded $6.81, or 5.8%, to $124.84 a barrel as of 0527 GMT, after Axios reportedU.S. President Donald Trump will receive a briefing later in the day on new plans for potential military action against Iran.

The curve, a line plotting yields with various bond tenors, steepens when the gap between shorter and longer ends widens. On Thursday, it bear-steepened as long-term interest rates rose faster than short-term rates.

The five-year yield JP5YTN=JBTC rose 4 bps to a record high of 1.895%. The two-year JGB yield JP2YTN=JBTC, which is most sensitive to BOJ policy, pared early gains to 1.375%, up 0.5 bp on the day following strong auction results.

Japanese yields were likely catching up with the rise in U.S. interest rates during Japan's market holiday on Wednesday, while a weaker yen also stoked concerns about imported energy-driven inflation, making longer-dated bonds less attractive, said Miki Den, senior Japan rate strategist at SMBC Nikko Securities.

"With the holiday period approaching, investors may be reducing risk ahead of the break, which could be contributing to the steepening," Den said.

Japan entered the "Golden Week" holidays on Wednesday, when trading ​becomes thin.

Separately, Reuters reported that Japan is considering reinstating electricity and natural gas subsidies for three months starting July, with funding of up to about 500 billion yen, to be drawn from reserve funds rather than a supplementary budget.

($1 = 160.4700 yen)