TOKYO, Sep 19 (Reuters) The yield on two-year Japanese government bonds hit a seven-month low on Wednesday as investors saw the Federal Reserve's hefty rate cut as making it harder for the Bank of Japan to raise interest rates this year.
The Fed on Tuesday slashed its benchmark federal funds rate by a half-percentage point to 4.75 percent to shield the economy from a housing slump and financial market turbulence.
The bigger-than-expected rate cut was interpreted as the opening salvo in a long campaign toward a looser monetary policy, boosting short-dated U.S. Treasuries.
But longer-dated JGBs fell as the Nikkei share average surged 3.5 percent in early trade after U.S. stocks were propelled to their biggest jump in four years on Tuesday following the Fed's rate cut.
Investors also took their cue from a fall in longer-dated Treasuries as the Fed's bold move sparked concern that the U.S.
central bank had weakened its commitment to fighting inflation.
"A rally in share prices and a rise in long-term Treasury yields despite the Fed's half-percentage point rate cut dampened sentiment for JGBs," said Masuhisa Kobayashi, chief JGB strategist at Barclays Capital.
December 10-year futures lost 0.29 point to 135.89 moving away from a 19-month high of 136.41 hit last week.
The 10-year JGB yield jumped 4 basis points to 1.565 percent.
It struck a 19-month low of 1.500 percent last week.
The two-year yield fell 1.5 basis points to 0.760 percent, the lowest since February, before rising to 0.775 percent.
The 20-year yield was up 4 basis points to 2.120 percent.
The yield curve steepened sharply, as a result.
With the Fed's rate decision out of the way, investors' attention turned to the BOJ as it concludes a two-day policy meeting on Wednesday. It is widely expected to leave interest rates steady at 0.5 percent.
Investors feel the Fed rate cut makes it harder for the BOJ to lift interest rates and will look to comments from Governor Toshihiko Fukui at a news conference after the meeting for clues on the future path of the Japanese central bank's monetary policy.
Due to ongoing turbulence in overseas credit markets, investors doubt if the BOJ will raise rates this year.
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