JGB yields fall as market awaits clear signs for BOJ's rate hike

By Junko Fujita

TOKYO, May 27 (Reuters) - Japanese government bond yields fell on Wednesday as the market awaited clearer signals for whether the Bank of Japan will raise interest rates as early as June, while improved appetite for debt supported the super long end.

The 10-year JGB yield fell 3.5 basis point (bp) to 2.685%. The two-year JGB yield fell 2 bps to 1.38%, while the five-year yield fell 3.5 bps to 1.93%.

Yields move inversely to bond prices.

BOJ Governor Kazuo Ueda said earlier in the day that central banks should not look at oil prices in isolation, because a temporary energy shock can become persistent if it feeds into wages, expectations, and price-setting behavior.

"His remarks were rather hawkish, but he did not indicate the BOJ could raise interest rates as early as next month," said Masahito Sugawara, senior strategist at Daiwa Securities.

There were no specific signals on early rate hikes from the remarks from BOJ Deputy Governor Ryozo Himino, who gave a public speech on Tuesday, Sugawara said.

The 20-year JGB yield fell 3 bps to 3.59%, and the 30-year yield fell 2 bps to 3.91%.

Yields fell despite concerns about worsening fiscal health as the government mulls a possible reduction of consumption taxes on food.

Demand for super long-dated bonds has improved because some institutional investors need to buy JGBs to adjust their portfolios as the stock market has rallied, to maintain specified ratios between asset classes, said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management.

The Nikkei index rose as much as 2.2% to hit a record intraday high on Wednesday.

Periodic demand from investors who track bond indexes to adjust their portfolio durations is a positive factor for government debt at the super long end.

Investors tend to buy longer maturity bonds at the end of the month as key indexes, such as the Nomura BPI, exclude shorter-dated bonds, to replace them with longer-dated notes in a move known as "big extension."

The 40-year JGB yield fell 2.5 bps to 4.065% after a bond auction for the same maturity saw solid demand. (Reporting by Junko Fujita; Editing by Ronojoy Mazumdar)