JGB futures plunge on BOJ outlook, Bernanke

By Rika Otsuka

TOKYO, June 10 (Reuters) - Japanese government bond futures plunged to a 10-month low on Tuesday, as expectations other major central banks will raise interest rates this year were seen paving the way for a potential hike by the Bank of Japan.

Federal Reserve Chairman Ben Bernanke on Monday sounded a warning over soaring energy costs and said the U.S. central bank would "strongly resist" any tendency for an inflationary psychology to take hold.

Bernanke's comments fueled jitters among bond investors, who were already nervous after European Central Bank President Jean-Claude Trichet said last week that euro zone interest rates might go up as soon as next month.

JGBs have been hit by heavy selling in the past two months, and their weakness has been compounded in recent weeks as a surge in oil prices to record highs stokes concerns about inflation.

"The JGB market is getting a big influence from the global interest rate outlook," said Atsushi Ito, fixed-income strategist at Morgan Stanley.

"A question still remains whether the BOJ will really raise interest rates," he said. "But at the moment, investors believe JGB yields are on a rising trend, convinced that other central banks are more concerned about inflation than problems in the financial sector." U.S. Treasuries slid on Monday, with short-dated bond yields posting their biggest one-day jump in 25 years, on expectations the Fed will raise rates later this year to fight inflationary pressures.

June 10-year futures 2JGBv1 slid as much as 1.90 points to 133.15, their lowest since early August, before recovering slightly to 133.33, down 1.72 points on the day. The 10-year yield jumped 9.5 basis points to 1.810 percent JP10YTN=JBTC, a 10-month peak.

The five-year yield surged 17 basis points to 1.475 percent JP5YTN=JBTC, its highest since late July.

The two-year yield was up 12 basis points at 0.965 percent JP2YTN=JBTC, a 10-month high.

The market's focal point on Tuesday is the Finance Ministry's auction of 1.9 trillion yen ($17.9 billion) in five-year debt, seen as a barometer of investor demand after unusually high volatility in the JGB market in the past three months.

The coupon was set at 1.5 percent, up from 1.3 percent at the previous month's auction and the highest since 1.5 percent at a July 2007 auction. (Editing by Brent Kininmont) (otsuka@thomsonreuters.com; +81-3-6441-1874; Reuters Messaging: rika.otsuka.reuters.com@reuters.net))