Japanese bond yields sink on new portfolio demand, Iran war optimism

By Junko Fujita

TOKYO, April 1 (Reuters) - Japanese government bond yields fell sharply on Wednesday as investors scooped up bonds at the start of the new fiscal year, with sentiment aided by optimism for the de-escalation of the Middle East conflict.

The five-year JGB yield JP5YTN=JBTC fell 5.5 basis points to 2.30%, and the 40-year JGB yield JP40YTN=JBTC fell 12 bps to 3.795%. Bond prices move inversely to yields.

"Domestic banks are seen rebuilding their portfolios as the new fiscal year started, and that supported the market today," said Takafumi Yamawaki, head of Japan rates research at J.P. Morgan Securities.

"Yields on mid-term bonds are at an attractive level given that investors now price in the Bank of Japan's policy rate to rise as high as 2%."

The JGBs saw a heavy selloff last week, sending the five-year bond yield to a record high, as rising oil prices fanned fears of inflation and the BOJ's early interest hike.

Investors adjusted positions at the end of the fiscal year, which also drove a surge in the yields last week, strategists said.

The market mood changed on Wednesday as U.S. President Donald Trump and his Secretary of State Marco Rubio said the end of the war on Iran could be near.

The 20-year JGB yield JP20YTN=JBTC slipped 7.5 bps to 3.205%, and the 30-year JGB yield JP30YTN=JBTC was down 10.5 bps to 3.61%.

Trades for the super-ends were thin on Wednesday, highlighting the concerns about an insufficient investor base in that sector, Yamawaki said.

The market needs to be alert for another unexpected surge in volatility, as demand for super-long bonds is supported by foreign investors and pension funds' rebalancing needs, said Yamawaki.

"Pension funds may sell JGBs when stocks fall," he said.