Japan's bond yield curve steepens on caution ahead of auction, fiscal spending worries

By Junko Fujita and Satoshi Sugiyama

TOKYO, April 6 (Reuters) - Japan's government bond yield curve steepened on Monday as caution grew ahead of an auction of 30-year debt, with rising oil prices and a weaker yen stoking worries of fiscal expansion.

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

The 10-year JGB yield JP10YTN=JBTC climbed 4.5 basis points (bps) to 2.425%, its highest since February 1999, while yields on the 20-year JP20YTN=JBTC and 30-year JGBs JP30YTN=JBTC rose more sharply.

"The market is cautious about the 30-year bond auction as the 10-year bond sale last week turned out to be much weaker than expectations," said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management. "Relative to a selloff of super-long bonds, the 10-year JGBs are firm."

The yield on 20-year bonds jumped 6.5 bps to 3.33%, and that of 30-year bonds rose 8 bps to 3.755%. The 40-year bond yield jumped 9 bps to 3.96%. Yields move inversely to bond prices.

"The thought of fiscal expansion crossed investors' minds as the oil prices remained under upward pressure," said Kentaro Hatono, head of global fixed income at Asset Management One.

"And traders unwound flattening positions as the market's expectations for the interest rate hike in April are not strong enough," he said.

Views on the Bank of Japan's interest rate hike have been divided since the start of the Middle East war in late February. Some market players say an early rate hike is needed to cope with upward price pressure. Others say the higher interest rates would hurt the nation's economy, which is sensitive to oil prices.

Swap rates indicated a 56.74% chance of the BOJ hiking the interest rate by 25 bps in April on Monday, lower than in previous sessions.

In an expletive-laden Easter Sunday social media post, U.S. President Donald Trump threatened to target Iran's power plants and bridges on Tuesday if the Strait of Hormuz is not reopened, setting a precise deadline of Tuesday 8 p.m. Eastern Time (0000 GMT).

The 30-year bond auction will be held on Tuesday before the Iran deadline. At the 10-year bond auction last week, demand was hurt as Trump dashed hopes for a swift end to the Iran war.

The two-year yield JP2YTN=JBTC rose 1 bp to 1.395%, a fresh 31-year high. The five-year yield JP5YTN=JBTC rose 3 bps to 1.825%.