TOKYO, May 30 (Reuters) - Japanese government bond prices gained on Thursday, taking heart from a rebound in U.S. Treasuries, though the two-year bond yield hit a 1 1/2-year high as the market braced for an offering of 2.9 trillion yen ($28.6 billion) two-year JGBs.
* The yield on the benchmark 10-year JGBs fell 4.0 basis points to 0.900 percent, distancing itself further from a 13-month high of one percent hit a week ago.
* The JGB market took its cue from U.S. Treasuries, whose yields fell sharply from highs hit in Wednesday’s Asian trade, helped by solid demand at a five-year notes sale.
* Japanese shares fell more than 3 percent in morning trade, easing worries soaring stock prices could induce a major shift in Japanese investors’ asset allocation from bonds to stocks.
* The market showed no reaction to a series of comments Bank of Japan Governor Haruhiko Kuroda made in the parliament. He reiterated his mantra that he wanted to lower the volatility of the JGB market but also added that inflation expectations are rising.
* The BOJ’s pledge to boost inflation to two percent in two years is at the heart of market volatility, bond market participants say.
* “Everything comes down to whether the BOJ can achieve that ambitious target. If the yen is to fall to around 120 per dollar, we think that’s possible,” said AKito Fukunaga, chief rates strategist at RBS Securities.
* “Until April, everyone thought two percent inflation would be impossible. But now people think they cannot completely rule out that possibility,” Fukunaga added.
* Analysts say JGB yields could rise further if investors grow more worried that inflation may rise faster than they are expecting.
* Core nationwide inflation for April, due on Friday, is expected to have fallen 0.4 percent. But economists expect prices to turn positive later in the year to post a 0.3 percent rise in the fiscal 2013/14.
* The BOJ’s forecast is near the high end of market economists’ forecast, with the median forecast by the central bank’s board member for 2013/14 at 0.7 percent.
* Short-dated bonds bucked the overall trend, with two-year bond yield rising 1.0 basis point to 0.150 percent , its highest since October 2011, on caution ahead of the auction.