Benchmark JGB yield soars to 5-1/2-year high

TOKYO, April 14 (Reuters) - The yield on benchmark 10-year Japanese government bonds soared to a 5-1/2-year high on Friday, hoisted by a wave of selling across global bond markets as central banks ratchet up short-term interest rates.

JGBs have been battered all year long as investors brace for the Bank of Japan to begin lifting overnight rates from zero in the third quarter this year as the economy stages a solid recovery from nearly a decade of deflation.

The BOJ appears set to join the Federal Reserve and European Central Bank in turning the screws on cheap money, slamming government bond markets that had become long accustomed to relaxed monetary policies.

The benchmark 10-year bond yield jumped 5.5 basis points to 1.980 percent, the highest since September 2000, just after the BOJ last raised short-term rates in August of that year. Ten-year yields later pulled back to 1.965 percent.

A day earlier 10-year U.S. Treasury yields soared to four-year highs above 5 percent and 10-year Bund yields struck 18-month peaks just below 4 percent.

Making matters worse for JGBs was the lack of follow-through buying at a five-year auction the previous day, even though it was one of the first major auctions since the new fiscal year began this month and was expected to draw demand.

"The combination is pretty tough on JGBs," said John Richards, director of Asian interest rate strategy at Barclays Capital in Tokyo.

Five-year yields spiked up 6.5 basis points to 1.440 percent, an all-time high since the maturity was first issued in February 2000, before settling down to 1.415 percent.

Two-year yields, the most sensitive to the monetary policy outlook, rose two basis points to 0.685 percent but are still below a seven-year high of 0.715 percent struck in late March.

At such peaks, investors appear keen to begin locking in yields not seen in years, especially once the 10-year yield reaches 2 percent. Except for brief spikes in 1999, the 10-year yield has been stuck below 2 percent for almost nine years.

In interviews with Reuters, Japan's biggest life insurers have said they will shift more funds into domestic bonds in the fiscal year that began this month and find current JGB yield levels alluring.

Futures also took a hammering, with the June 10-year contract falling 0.36 point to 131.97 and plunging as far as 131.75 in early trade, the lowest since September 2000.

The jump in yields prompted Finance Minister Sadakazu Tanigaki to say on Friday the moves in the bond market warrant attention, adding that he is concerned markets may not understand the BOJ's stance after scrapping quantitative easing.

The BOJ is expected to start lifting interest rates in the third quarter and possibly as soon as July, once the central bank has finished mopping up the excess reserves from quantitative easing over the next few months.

At 0500 GMT the BOJ will release the minutes of its March 8-9 policy board meeting at which the central bank scrapped its super-loose policy of flooding the banking system with cash, a first step toward raising short-term rates.

Analysts expect the minutes to show the BOJ's confidence that the economy will sustain its strength but shed little light on when the central bank will raise rates, now pegged at virtually zero. The overnight call rate traded at 0.001 percent on Friday.

After a policy meeting this week, BOJ Governor Toshihiko Fukui gave few clues on the rate outlook.

Euroyen futures are factoring in the BOJ lifting rates to 0.5 percent by the end of the calendar year and to 0.75 percent by the end of March next year. The lead December contract fell a basis point to 99.290.

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