JGBs hit as stocks rise, 2-yr yield marks 4-mth high

By Chikako Mogi

TOKYO, April 24 (Reuters) - Japanese government bonds fell on Thursday as Tokyo shares rebounded, with the two-year yield hitting a four-month high ahead of an auction for the maturity.

JGB futures erased earlier gains to mark a two-month low as cash bond yields edged higher.

As market worries about a global credit market crisis eased, investors took profits on a plunge in yields, bringing them back towards levels that appear to reflect the view that the Bank of Japan will keep interest rates steady for several months, traders said.

In addition, players were sensing a shift in the direction of global monetary policy, after hawkish remarks from European Central Bank officials suggested the ECB's next move would be to boost rates rather than cut them, analysts said.

ECB officials, including Governing Council member Christian Noyer, said earlier this week that the central bank was prepared to raise rates if needed to bring inflation under control.

"A change in the broad direction of global monetary policy may be affecting trading by foreign investors, particularly as the markets are starting to factor in an ECB rate hike," said Chotaro Morita, chief fixed-income strategist at Barclays Capital.

"Also, as the markets regain some calm, investors see 10-year JGB yields hovering around 1.2-1.3 percent levels are an overshoot given current economic fundamentals in Japan, and are undergoing a correction," he said, adding that players were likely to test 1.5 percent.

The two-year yield <JP2YTN=JBTC> rose 2 basis points to 0.705 percent, the highest since Dec. 28, as players braced for a Ministry of Finance auction on Thursday of 1.7 trillion yen ($16.43 billion) of two-year notes with a 0.7 percent coupon.