Japan bonds rise on stronger yen as traders weigh BOJ hike timing

By Kevin Buckland

TOKYO, Jan 26 (Reuters) - Japanese government bonds rose on Monday with the yen's surge amid heightened risks of currency intervention reducing the need for the Bank of Japan to rush further interest rate hikes.

The yield on the benchmark 10-year JGBs JP10YTN=JBTC, declined 1 basis point (bp) to 2.225%, opening up additional distance from the 27-year high of 2.38% reached last Tuesday.

Bond yields move inversely to prices.

Super-long yields also eased from all-time peaks reached last week, with 20-year yields JP20YTN=JBTC dropping 3.5 bps to 3.155% and 30-year yields JP30YTN=JBTC sliding 3 bps to 3.61%.

Shorter-dated yield ticked higher though, with the two-year yield JP2YTN=JBTC up 2 bp to 1.27% - the highest level since May 1996 - and the five-year yield JP5YTN=JBTC rising 0.5 bp to 1.695%.

Bond yields had surged and the yen had slumped in tandem after Japanese Prime Minister last week called a snap election for February 8, as investors worried about a loosening of the fiscal reins in the developed world's most indebted nation.

However, the currency strengthened to a more than three-month high of 153.815 per dollar on Monday after Japanese officials said they were closely coordinating with U.S. authorities on reining in recent yen weakness.

It spiked several times on Friday amid speculation that both Japanese and U.S. central banks had conducted so-called rate checks, a common precursor to intervention that involves asking banks for foreign-exchange rates.

The BOJ has flagged prolonged yen weakness as potentially stoking inflation, stoking bets for earlier rate hikes, so how the currency trades from here will be crucial for monetary policy, according to Mizuho Securities analysts.

If the yen appreciates significantly due to the intervention, the BOJ's need to raise interest rates early, on the grounds of curbing the yen's depreciation, will decrease, the analysts wrote in a client note.

"However, if the yen depreciation trend does not stop even after intervention, demand for the Bank of Japan to raise interest rates will also intensify."

Swaps traders currently price two quarter-point rate hikes this year, likely in June and October, according to LSEG calculations.