JGB yields jump as Iran war raises inflation risks, fuelling rate-hike bets

(Recasts paragraph 1, updates yield prices)

By Satoshi Sugiyama

TOKYO, March 3 (Reuters) - Japanese government bond (JGB) yields jumped across the board on Tuesday, as concerns that a prolonged U.S.-Israeli war against Iran would stoke inflation via higher energy prices fuelled bets of an interest rate hike.

The 20-year yield went up 7.5 basis points (bps) to 2.955%. The benchmark 10-year JGB yield rose 7 bps to 2.13%, with a relatively neutral outcome at an auction for notes of the same maturity having little impact.

"Fears of inflation stoked expectations for the Bank of Japan's interest rate hike, while a jump in overseas yields weighed on market sentiment," said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

U.S. Treasury yields shot higher after military strikes in Iran by the U.S. and Israel, followed by counter-strikes by Tehran across the Middle East, sparked a jump in oil and gas prices and raised fears about escalating inflation.

Japan, which relies heavily on energy imports, would be hit hard by increases in energy prices, raising bets that the BOJ would have to hike interest rates early to counter inflation, some market players say.

Still, sources told Reuters that fresh market volatility triggered by the Iran conflict had heightened the chance the BOJ would hold off on raising rates in March, with the only factor that might prod the central bank to increase borrowing costs at the upcoming meeting would be sharp falls in the yen.

JGB yields fell sharply in the previous session in part because investors bought safe-haven assets in the wake of the Iran war.

The two-year yield climbed 3 bps to 1.245% and the five-year yield rose 6.5 bps to 1.595%.

The 30-year yield rose 4.5 bps to 3.32%. The 40-year yield climbed 5 bps to 3.555%.

($1 = 157.4900 yen) (Reporting by Satoshi Sugiyama; Additional reporting by Junko Fujita; Editing by Subhranshu Sahu and Mrigank Dhaniwala)