Japan benchmark bonds rally ahead of 20-year debt sale

By Rocky Swift

TOKYO, March 17 (Reuters) - Benchmark Japanese government bonds (JGBs) edged higher on Tuesday, supported by demand ahead of a long-term debt sale, as investors weighed the impact of imported energy inflation.

The 10-year JGB yield JP10YTN=JBTC fell 0.5 basis points to 2.27%. Yields move inversely to bond prices.

The Ministry of Finance is due to sell about 800 billion yen ($5.03 billion) in 20-year JGBs later in the day.

The yield on the security hit a five-week high on Monday, as the raging war in Iran kept oil prices elevated and reinforced expectations that central banks may need to raise rates to contain inflation.

The Bank of Japan is widely expected to leave its key interest rate unchanged at its policy meeting on Thursday. Still, surging imported energy costs and a weakening yen are strengthening the case for a quicker pace of rate hikes.

The recent rise in yields, along with MoF plans to reduce issuance of long-term JGBs in the next fiscal year, could support demand at the auction, said Gen Taniguchi, market analyst at Mizuho Securities.

"These changes should help to tighten up supply/demand in the super-long sector quite significantly, as could apparent confirmation that the MoF intends to keep shortening the average maturity of its fresh issuance," Taniguchi said in a note.

The 20-year JGB yield JP20YTN=JBTC ticked up 0.5 bp to 3.150%. The yield on the 40-year note JP40YTN=JBTC, Japan's longest tenor, fell 0.5 bps to 3.785%.

The two-year yield JP2YTN=JBTC, the one most sensitive to BOJ policy rates, was flat at 1.275%. The five-year yield JP5YTN=JBTC fell 0.5 bps to 1.685%.

($1 = 159.1900 yen)