JGB yields jump as Middle East tensions fuel inflation fears

By Satoshi Sugiyama

TOKYO, March 9 (Reuters) - Japanese government bonds (JGBs) yields jumped across the curve on Monday, as a surge in oil prices, driven by the escalating U.S.-Israeli war with Iran, stoked inflation fears and pressured the yen.

The benchmark 10-year JGB yield JP10YTN=JBTC rose 6.5 basis points (bps) to 2.225%, the 20-year JGB yield JP20YTN=JBTC climbed 8.5 bps to 3.085%. Yields move inversely to bond prices.

The inflation concerns from rising crude are stronger than the increase in risk-averse sentiment, thereby pushing interest rates higher, said Okasan Securities chief bond strategist Naoya Hasegawa.

"Until recently, the bond market had largely been taking its cues from swings in equities, but with crude oil prices now rising more sharply, inflation concerns have become the somewhat stronger driver," Hasegawa said.

"If that calms down, bonds may see some buying interest."

Oil prices surged about 20% in early trade on Monday to their highest since July 2022, as the widening Middle East conflict raised fears of tighter supply and prolonged disruptions to shipments through the Strait of Hormuz, a key Middle East chokepoint.

The U.S. dollar rose 0.5% to 158.68 yen JPY=EBS, weakening the Japanese currency and adding to domestic price pressures by raising import costs.

"What really matters is the time horizon that if higher oil prices persist, that would work in a direction that encourages the Bank of Japan to raise rates," said Noriatsu Tanji, chief bond strategist at Mizuho Securities.

"Ultimately, if inflation rises significantly, central banks will have no choice but to prioritize that."

The 30-year yield JP30YTN=JBTC added 9 bps to 3.475%. The yield on the 40-year JGB JP40YTN=JBTC, Japan's longest tenor, rose 8.5 bps to 3.68%.

The two-year yield JP2YTN=JBTC, which is most sensitive to BOJ policy rates, advanced 0.5 bps to 1.245%. The five-year yield JP5YTN=JBTC rose 4 bps to 1.655%.