JGB yields slump as US tariffs lower BOJ's rate-hike bets

(Updates yield levels, adds comments)

TOKYO, April 3 (Reuters) - Japanese government bond (JGB) yields tanked on Thursday, as bets for the Bank of Japan's early interest rate hikes retreated as U.S tariffs stoked worries about the slowdown of the global economy.

The 10-year JGB yield fell as much as 13 basis points to 1.34% earlier in the session to hit its lowest level since February 26.

The yield posted its biggest drop since August 5, when bond and stock markets were hit with their biggest swing since the 1987 'Black Monday' crash.

The 10-year bond yield was last down 9 bps at 1.38%. Bond yields move inversely to prices.

"The market reaction was too big, but this is a reflection that investors' expectation for the central bank's interest rate hike was overheated," said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.

"They focused too much on domestic wages and prices and underestimated the impact of the U.S. tariff plans."

Investors globally scrambled to the safety of bonds on Thursday as U.S. President Donald Trump unveiled a bigger-than-expected wall of tariffs around the world's largest economy, upending trade and supply chains.

The bets that the BOJ would raise its policy rate at a faster pace than the market had expected sent yields across some tenors to 17-year highs only last week.

The central bank kept interest rates steady in March but warned of heightening global economic uncertainty, suggesting the timing of further rate hikes will depend largely on the fallout from potentially higher U.S. tariffs.

Swap rates indicated a 9.5% chance of the BOJ raising rates by 25 bps to 0.75% at its policy meeting in May.

The yields on other maturities fell sharply to their two months lows, with the five-year yield slipping 9.5 bps to 0.98%, and the two-year JGB yield falling fell 5.5 bps to 0.775%.

(Reporting by Junko Fujita; Editing by Tom Hogue and Rashmi Aich)