Shorter-dated JGB yields fall as Iran tension reduces BOJ rate-hike expectations

By Satoshi Sugiyama

TOKYO, March 4 (Reuters) - Shorter-dated Japanese government bond (JGB) yields fell on Wednesday, as investors scaled back expectations for an early rate hike by the Bank of Japan in the wake of U.S. and Israeli military actions against Iran.

The two-year yield, the one most sensitive to Bank of Japan policy rates, decreased 1.5 basis points (bps) to 1.23%. The five-year yield fell 2.5 bps to 1.565%.

"For the shorter-term maturities, there's a growing view that additional rate hikes will be somewhat difficult, and with geopolitical risk like this, that view may strengthen," said Hiroshi Namioka, chief strategist at T&D Asset Management.

The benchmark 10-year JGB yield fell 1 basis point (bp) to 2.115%. Yields move inversely to bond prices.

Sources told Reuters that fresh market volatility triggered by the Middle East conflict has heightened the chance of the BOJ holding off raising borrowing costs this month, as policymakers need more time to gauge the impact on the economy.

At the same time, some analysts speculate that the BOJ would have to hike interest rates early to counter inflation as Japan, which relies heavily on energy imports, would be hit hard by increases in energy prices.

U.S. Treasury yields rose for a second straight session overnight, but eased from earlier highs, reflecting optimism among traders stateside that the conflict won't spiral into a lengthy crisis and on a stronger U.S. position in energy than European peers.

The longer-dated JGB yields climbed, as speculation swirled that the conflict could force Japan to expand defence spending, which could further strain the country's fiscal health.

The 30-year yield added 1 bp to 2.955%. The yield on the 40-year JGB, Japan's longest tenor, rose 1.5 bps to3.56%. (Reporting by Satoshi Sugiyama; Editing by Subhranshu Sahu)