JGB yields track US peers higher, inflation-linked bond auction aids sentiment

(Updates at 0720 GMT)

TOKYO, Aug 16 (Reuters) - Japanese government bond yields rose on Friday, tracking a jump in U.S. Treasury yields overnight, while sentiment was helped after a better-than-expected outcome of an auction of inflation-linked bonds.

The 10-year JGB yield rose 3.5 basis points (bps) to 0.87% and the five-year yield rose 4.5 bps to 0.49%.

U.S. Treasury yields surged on Thursday after strong economic data all but eliminated fears about a hard economic landing and curtailed expectations that an aggressive Federal Reserve easing was coming next month.

The auction of the 10-year inflation-linked bonds turned out to be modestly firm, with the lowest price exceeding the forecast.

The auction received bids worth 2.96 times the amount sold, lower than a ratio of 4.27 times at the previous auction.

"Overall we can conclude that the outcome was modestly firm," said Takahiro Ootsuka, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley.

Inflation-linked bonds are valued through the break-even inflation rate (BEI), which measures the gap in yields between the so-called "linkers" and JGBs.

The BEI for 10-year inflation-linked bonds fell to as low as 0.929% on Aug. 5, when the Nikkei fell the most in nearly 40 years, from 1.662% in late July. It was last at 1.332%.

Ootsuka said the outcome was better than expectations as some investors thought the BEI's current level reasonable.

The market is monitoring the impact of a recent recovery in the yen on inflation, as a stronger yen lowers imports, said Naoya Hasegawa, chief bond strategist at Okasan Securities.

The yen sank to a 38-year low against the U.S. dollar last month but surged to a seven-month high of per dollar last week.

The two-year JGB yield rose 3.5 bps to 0.35%.

The 30-year JGB yield rose 2 bps to 2.040%.

The 40-year JGB yield rose 2.5 bps to 2.28%. (Reporting by Junko Fujita; Editing by Subhranshu Sahu and Mrigank Dhaniwala)