JGB yields jump as Trump says US to continue Iran war

By Junko Fujita

TOKYO, April 2 (Reuters) - Japanese government bond yields jumped on Thursday, after U.S. President Donald Trump dashed hopes for a swift end to the Middle East war, hurting the outcome of the auction for benchmark 10-year bonds.

The 10-year JGB yield JP10YTN=JBTC jumped 9 basis points (bps) to 2.39%, matching its highest level since February 1999, scaled on Monday.

The 20-year bond yield JP20YTN=JBTC jumped 15 bps to 3.21%, and the 30-year bond yield JP30YTN=JBTC rose 9 bps to 3.705%. Yields move inversely to bond prices.

In Trump's national address, he said the conflict in Iran would end soon, but the U.S. military would continue to hit targets there over the next two to three weeks.

"Uncertainties over the Middle East war grew after Trump's speech. That affected the 10-year bond auction," said Shuichi Ohsaki, senior portfolio manager at Meiji Yasuda Asset Management.

"The auction was probably supported by demand from dealers who needed to cover short positions," he said.

The auction's bid-to-cover ratio, a measure of demand, was 2.57 times, compared with 3.3 times at the previous sale.

JGB yields have been under upward pressure, and investors have been cautious about buying bonds amid market expectations of the Bank of Japan's interest rate hike as early as this month.

A weaker yen and a spike in oil prices increased inflation risk, fanning bets on an early rate hike. The yen weakened after Trump's address.

"On top of these things, there is a tailwind for the BOJ's rate hike, as major central banks are seen tightening their policy," said Kentaro Hatono, head of global fixed income at Asset Management One.

Global brokerages are increasingly betting that the European Central Bank could raise rates as early as April, while pushing back rate-cut expectations for the Bank of England, after policymakers warned the U.S.-Israeli war on Iran is stoking inflation risks.

"If Japan keeps its low rate policy, the gap in interest rates would widen, and that could weaken the yen further," said Hatono.

The two-year bond yield JP2YTN=JBTC rose 2.5 bps to 1.37%.

The 30-year bond yield jumped 9 bps to 3.705%.