JGB 10-yr yield hits 9-mth high before auction

By Chikako Mogi

TOKYO, May 27 (Reuters) - The yield on benchmark 10-year Japanese government bonds rose to a fresh nine-month high on Tuesday on investor caution before a 20-year bond sale and as Tokyo shares rebounded from the previous day's declines.

JGBs have been vulnerable as investors worry about the mounting inflation threat from surging oil prices, which hit a record high above $135 a barrel CLc1 last week.

Medium-term bonds continued to be pressured by selling from banks seeking to further reduce JGB holdings they had built up during the credit crisis. Their portfolios had been hit hard by the sharp sell-offs over the past two months.

Life insurers, looking to reshuffle their portfolios, may also be behind the shedding of medium-term maturities as they buy longer-dated bonds to match their liabilities, some traders said.

The Ministry of Finance will offer 800 billion yen ($7.74 billion) in 20-year JGBs later in the day, with traders expecting a 2.3 or 2.4 percent coupon, up from 2.2 percent in the April issue of the maturity.

A 2.3 percent coupon would be the highest since a July 2007 issue, while a 2.4 percent coupon would be the highest since a July 2004 issue of 20-year JGBs.

Traders said the auction would likely be smooth, with life insurers and other institutional investors drawn by the spike in longer-dated yields.

"Market sentiment remains weak, with investors jittery about rising inflation," said Koji Ochiai, senior market analyst at Mizuho Securities.

"The range for yields is likely to be gradually revised upwards, with players increasingly seeing 1.7 percent as a floor for 10-year yields, and a 2.0 percent yield in sight."

June 10-year futures 2JGBv1 fell 0.24 point to 134.24, inching closer to a nine-month trough of 133.93 hit on Friday.

The benchmark 10-year yield JP10YTN=JBTC rose 3 basis points to 1.770 percent, a nine-month high.

The five-year yield JP5YTN=JBTC climbed 4 basis points to 1.340 percent, also a nine-month peak.

The Nikkei stock average .N225 was up 1 percent.

($1=103.42 yen) (Editing by Brent Kininmont)