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 to a month high 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.

Given Japan's heavy reliance on Middle Eastern oil, the rising energy costs risk reviving cost-of-living pressures by pushing up import prices and nudging the Bank of Japan toward interest rate hikes, some strategists said.

"Ultimately, if inflation rises significantly, central banks will have no choice but to prioritize that," said Noriatsu Tanji, chief bond strategist at Mizuho Securities.

The benchmark 10-year JGB yield JP10YTN=JBTC rose 4 basis points (bps) to 2.200%. Bond yields move inversely to prices.

The two-year yield JP2YTN=JBTC, the one most sensitive to Bank of Japan policy rates, increased 1 bp to 1.25%. The five-year yield JP5YTN=JBTC rose 2 bps to 1.635%.

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.

Oil prices surged about 20% in early trade 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 regional chokepoint.

The U.S. dollar rose 0.4% to 158.67 yen JPY=EBS, weakening the Japanese currency and adding to domestic prices.

Yields on super-long-term maturities also moved higher. The 20-year JGB yield JP20YTN=JBTC climbed 8.5 bps to 3.085%, while the 30-year yield JP30YTN=JBTC added 9 bps to 3.475%.

The 40-year JGB JP40YTN=JBTC yield, Japan's longest tenor, rose 8.5 bps to 3.68%.

In addition to inflation concerns, overseas investors may be selling super-long JGBs to reduce risk exposure, said Shuichi Osaki, senior portfolio manager in the fixed-income department at Meiji Yasuda Asset Management.