JGBs tumble as sights shift towards BOJ rate hike

By Eric Burroughs

TOKYO, April 25 (Reuters) - Japanese government bonds tumbled on Friday, driving the two-year yield to a six-month peak, as investors have switched their sights towards an eventual Bank of Japan interest rate hike.

Rising inflation pressures, an expected pause in the Federal Reserve's aggressive run of rate cuts and speculation about a European Central Bank rate increase have caught off guard bond investors around the world this week.

Signs the U.S. economy is holding up despite the ongoing housing market debacle have also convinced more investors the Fed may keep rates on hold for a while after an expected quarter-point trim to 2 percent next week.

In such an environment, market players are now betting that the BOJ will eventually lift rates from the current 0.5 percent rather than cut them -- spurring huge selling of JGB and euroyen futures from foreign CTA accounts and hedge funds, traders said.

Swap contracts on the overnight call rate <JPONIBOJ=TRDT> are reflecting a 25 percent chance of a BOJ rate hike by the end of the year.

"If we can't expect a rate cut anytime soon, then the long positions based on that scenario need to be unwound," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities.

June 10-year futures 2JGBv1 slid 0.90 point to 136.22 and plunged as far as 136.06.

Domestic investors have also been surprised by the abrupt shift in sentiment on the BOJ policy outlook and have been forced to sell after having picked up bonds as yields rose earlier in the week, analysts said.