Trade deal optimism sinks Japanese bonds as safe-haven assets lose appeal

By Kevin Buckland

TOKYO, July 24 (Reuters) - Japanese government bonds fell on Thursday, pushing the benchmark yield back to its highest level since 2008, as market optimism that U.S. trade deals with Europe and China were close dented demand for safe-haven debt.

More clarity over the economic outlook in the wake of Tuesday's tariff agreement between Tokyo and Washington had traders and analysts reckoning that the Bank of Japan could soon resume interest rate hikes, adding further upward pressure on yields.

The European Union was moving towards a deal that could include a 15% U.S. baseline tariff, European diplomats said Wednesday. China's Vice Premier He Lifeng will visit Sweden from July 27-30 for a new round of trade talks with U.S. officials.

The benchmark 10-year JGB yield JP10YTN=JBTC ticked up as high as 1.6%, matching Wednesday's peak, a level not previously seen since October 2008.

Two-year JGB yields JP2YTN=JBTC, which are most sensitive to policy rate expectations, rose 1.5 basis points to 0.845%, the highest since April 2.

Five-year yields JP5YTN=JBTC added 1.5 bps to touch 1.135% for the first time since March 28.

The central bank's next monetary policy meeting is scheduled for Wednesday and Thursday of next week, although traders are eyeing October as the more likely timing for a potential rate hike, putting the odds at about a coin toss.

Japanese lender Resona Holdings' chief investment officer Hideki Tahara also takes that view, and expects the 10-year JGB yield to rise into a range between 1.7% and 2.2% over the next couple of years.

"There's a good chance we'll start buying in earnest when yields close in on 2.2%," Tahara said in an interview on Wednesday.

Longer-dated JGB yields, however, fell on Thursday, as investors judged a sharp rise in yields on Wednesday was overdone.

Investors are concerned about a political shift towards looser fiscal policy after Prime Minister Shigeru Ishiba's coalition lost its upper house majority in an election on Sunday, with opposition parties backing consumption tax cuts making notable gains.

The 20-year JGB yield JP20YTN=JBTC declined 2 bps to 2.58% in the latest session, while the 30-year yield JP30YTN=JBTC fell 3.5 bps to 3.095% and the 40-year yield JP40YTN=JBTC sank 5.5 bps to 3.4%.