Shorter-end JGB yields hit over 16-year highs as BOJ rate-hike bets persist

By Brigid Riley

TOKYO, March 26 (Reuters) - Japanese government bond (JGB) yields edged higher on Wednesday, as expectations that the Bank of Japan will continue to raise interest rates this year sent shorter-term bond yields up to more than 16-year peaks.

Both the 10-year JGB yield JP10YTN=JBTC and five-year yield JP5YTN=JBTC rose 1 basis point (bp) to their highest levels since October 2008 at 1.585% and 1.18%, respectively.

The two-year JGB yield JP2YTN=JBTC, which corresponds more closely with monetary policy expectations, ticked up 0.5 bp to 0.88%, a level last seen in June 2008.

Speaking in Japan's parliament on Wednesday, BOJ Governor Kazuo Ueda said the central bank must raise rates if persistent increases in food costs lead to broad-based inflation, signalling the bank's resolve to continue weaning the economy off monetary support.

A majority of investors expect another rate hike in July, although some market players are betting the BOJ will move as soon as May.

Yields moved in a tight range, however, as the fiscal year in Japan draws to a close this week. Investors also had an eye on an auction for 40-year JGBs scheduled for Thursday.

"Many market participants find it difficult to move into the (fiscal year)-end, but we expect some rebalancing and extension purchases from pension funds, a major participant in the sector," as well as some demand from life insurers, Barclays rates strategist Ayao Ehara and head of Japan FX/rates strategy Shinichiro Kadota wrote in a research note.

The 40-year JGB yield JP40YTN=JBTC was flat at 2.94% ahead of Thursday's auction.

Tokyo consumer price index report and a summary of opinions from the BOJ's monetary policy meeting last week, both due on Friday, will be a point of focus later this week.

The 20-year JGB yield JP20YTN=JBTC edged 0.5 bp higher to 2.305%, while the 30-year JGB yield JP30YTN=JBTC climbed 1.5 bps to 2.61%.

Benchmark 10-year JGB futures 2JGBv1 slid 0.17 points to 137.31 yen.