Benchmark JGB yields rise to 27-year high as war drives inflation fears

By Rocky Swift

TOKYO, April 3 (Reuters) - Benchmark Japanese government bond (JGB) yields touched a near three-decade high on Friday as the Middle East war neared its fifth week, escalating concerns about inflation and economic slowdown.

The benchmark 10-year JGB yield JP10YTN=JBTC reached 2.395%, the highest since February 1999, before edging 0.5 basis point (bp) lower to 2.385%. The two-year yield JP2YTN=JBTC, the one most sensitive to Bank of Japan policy rates, was at 1.385%, a level not seen since May 1995. Yields move inversely to bond prices.

In a highly anticipated speech that aired during Asian trading hours on Thursday, U.S. President Donald Trump repeated threats against Iran's civilian power plants and gave no clear timeline for ending hostilities. Since it began with a joint U.S.-Israeli aerial assault on February 28, the war continues to spread chaos across the region, driving prices for petroleum products sharply higher.

Japan's economy remains exposed to spikes in crude oil prices due to its reliance on imported energy. Inflationary risks erode the real value of fixed bond payments and increase pressure on the central bank to tighten monetary policy in order to contain prices.

"There is a possibility that interest rates will be pushed lower to some extent by dip-buying," Ataru Okumura, a senior strategist at SMBC Nikko Securities, said in a note.

"There is also a risk of a bear steepening due to expectations of accelerating inflation, so it is unlikely that interest rates will decline significantly."

The 20-year JGB yield JP20YTN=JBTC climbed 2.5 bps to 3.290%, while the 30-year yield JP30YTN=JBTC added 2 bps to 3.7%.

"If the government adopts a more expansionary fiscal stance as the war in Iran drags on, it could have a significant impact on ultra-long-term interest rates," Noriatsu Tanji, chief bond strategist at Mizuho Securities, said in a note.

"In particular, as mentioned above, if supply constraints lead to large-scale restrictions on economic activity, pressure for fiscal expansion is likely to intensify."