JGBs slide as investors spooked by inflation threat

By Eric Burroughs

TOKYO, May 22 (Reuters) - Japanese government bonds slid on Thursday as investors booked profits on three days of gains and fretted about the mounting inflation threat from oil prices surging to record peaks above $135 a barrel.

But analysts said the drop in JGBs would likely be limited, with investors focusing on how oil's surge could hobble global growth by hurting consumer spending and corporate profits.

U.S. crude oil vaulted to a record peak of $135.04 CLc1, driving the dollar and equity markets down while giving a boost to gold. The Nikkei average .N225 fell 1.2 percent.

Investors were also spooked as the Federal Reserve both downgraded its growth forecasts but lifted its inflation forecasts, highlighting the policy difficulties the U.S. central bank faces with the economy already on the verge of a recession. [ID:nN21438129]

The minutes of the Fed's April meeting also reinforced that the central bank is unlikely to cut rates from 2 percent after already having chopped them by 3.25 percentage points since September.

"We are moving away from stagflation to inflation," said Freddy Lim, chief Japan fixed-income strategist at Morgan Stanley.

"The better the Fed is at forestalling a further crisis, the worse it is for inflation. People are talking about this a lot and are very concerned."

JGBs had pushed higher as speculators covered short positions in the tumble in futures to seven-month lows last week, while some portfolio managers started to shift funds into the market that has been battered by two months of severe volatility.

Expectations the Bank of Japan is likely to keep interest rates at 0.5 percent for several months to come has also underpinned JGBs, even as market players believe the next move is likely to be a rate increase.

June 10-year futures 2JGBv1 fell 0.53 point to 135.33 but were well above the seven-month trough of 134.28. The benchmark 10-year yield JP10YTN=JBTC rose 5 basis points to 1.655 percent, while the five-year yield JP5YTN=JBTC climbed 3.5 basis points to 1.200 percent.

The two-year yield JP2YTN=JBTC rose 2 basis points to 0.800 percent as the yield curve steepened.

Data on Thursday showed Japanese exports grew a better-than-expected 4 percent in April from the previous year thanks to demand from Asian and Middle Eastern countries, even as shipments to the United States fell further.

But a surprisingly big surge in imports knocked the overall trade surplus lower to 485.0 billion yen ($4.71 billion) compared with forecasts for 725 billion yen. [ID:nT305620] "Today's data suggests a slowdown in exports, and probably a sustained one given more signs of slower economic activity broadening from the United States to the rest of the globe," said Kiichi Murashima, director of economic and market analysis at Nikko Citigroup.

($1=102.96 yen)

(Editing by Brent Kininmont)