TOKYO, Feb 27 (Reuters) - Japanese government bond (JGB) yields rebounded on Tuesday after domestic inflation data surprised to the upside, firming up confidence that the Bank of Japan will exit negative interest rates this spring.
The benchmark 10-year JGB yield rose by 1 basis point (bp) to 0.695%.
The two-year JGB yield edged up 1.5 bps to 0.170%, its highest level since July 2011.
Although Japan's core consumer inflation slowed for a third straight month in January, it still beat forecasts and held at the central bank's 2% target, gaining 2.0% in January compared with market forecasts for a 1.8% rise.
The latest inflation report "has led market participants to be somewhat more cautious about the possibility of negative interest rate policy being lifted at the March BOJ meeting," said Ryutaro Kimura, fixed income strategist at AXA Investment Managers.
However, with the 10-year still hovering around 0.7%, investors appear to be maintaining bets that monetary policy will remain relatively accommodative even after normalisation, he added.
BOJ Governor Kazuo Ueda said on Thursday the bank expects a positive cycle in Japan in which higher job and wage growth leads to moderate rises in inflation, and sources familiar with the BOJ's thinking say the central bank is on track to exit from negative rates in coming months.
The five-year yield ticked up 1 bp to 0.350%.
The 20-year JGB yield rose 2 bps to 1.435%. The 30-year JGB yield was up 2.5 bps at 1.700%.
Meanwhile, Japan's finance ministry held its second-ever auction for sovereign climate transition bonds on Tuesday, this time for five-year transition bonds.
The bid-to-cover -- a measure of demand at auctions -- was 3.39, compared to 3.44 at an auction for standard five-year JGBs earlier this month. A larger number suggests greater demand. (Reporting by Brigid Riley; Editing by Savio D'Souza)
