JGB yields jump as Middle East war fuels inflation fears

By Satoshi Sugiyama

TOKYO, March 9 (Reuters) - Japan's super-long bond yields jumped 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 yields on the 30- and 40-year bonds JP30YTN=JBTC, JP40YTN=JBTC jumped as much as around 11 basis points each as oil prices surged more than 25%.

"The sharp rises in super-long dated bonds are a reflection of investor caution that the inflation may persist for a longer period," said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.

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 prioritise that," said Noriatsu Tanji, chief bond strategist at Mizuho Securities.

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.

The benchmark 10-year JGB yield JP10YTN=JBTC rose 2 bps to 2.17%. The five-year yield JP5YTN=JBTC inched up 0.5 bp to 1.62%. The two-year yield JP2YTN=JBTC reversed course to inch 0.5 bp lower at 1.235%.

The yen JPY=EBS fell against the U.S. dollar as investors bought safe-haven assets for liquidity. The weaker yen raises import costs, putting upward pressure on domestic 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.