Japanese Government Bonds Hold Steady Before Two-year Auction

TOKYO, March 31 (Reuters) - Japanese government bonds (JGBs) held steady on Tuesday ahead of a sale of two-year securities, with markets assessing the central bank's response to rising inflationary pressures from the Middle East crisis.

The benchmark 10-year JGB yield JP10YTN=JBTC fell 0.5 basis point (bp) to 2.350% after reaching as high as 2.390% on Monday, a level not seen since February 1999. The five-year yield JP5YTN=JBTC edged up 1 bp to 1.790%. Yields move inversely to bond prices.

Core consumer prices in Tokyo rose 1.7% in March from a year earlier, data showed on Tuesday, staying below the Bank of Japan's 2% target for a second straight month as the effect of fuel subsidies offset rising costs from a weak yen.

"Yields on U.S. and European bonds have been falling in defiance of rising oil prices, suggesting that a recession in the West is now being viewed as a realistic risk amid the prolonged conflict," said Ataru Okumura, a senior strategist at SMBC Nikko Securities. "Since we cannot be certain that the Bank of Japan will proceed with rate hikes at a rapid pace, medium-term JGBs are likely to enter a period of consolidation for the time being."

The Ministry of Finance is due to sell about 2.8 trillion yen ($17.53 billion) of two-year JGBs later in the day. The two-year yield JP2YTN=JBTC, the tenor most sensitive to BOJ policy rates, increased 0.5 bp to 1.36% after last week reaching 1.38%, the highest since May 1995.

($1 = 159.7300 yen)