GLOBAL MARKETS-Government bond prices sink, eyes on oil

                                
 (Updates prices, adds Hong Kong stock market prices and
comments)
                                
 By Kevin Plumberg
                                
 HONG KONG, June 2 (Reuters) - Japanese government bond
prices fell on Monday, hit by negative sentiment ahead of
auctions this week and with global inflation on the rise, while
oil prices held steady above $127 and Asian stocks edged
higher.
                                
 Government bond yields in the euro zone, Japan and the
United States hit 2008 highs last week as investors scrambled
to protect their portfolios from inflation with the worst of
the credit crisis apparently over.
                                
 "Credit markets and the U.S. economy have not been quite as
bad as expected. Also inflation has proven persistent, in large
part due to commodity prices," said Sean Callow, currency
strategist with Westpac in Sydney.
                                
 "This has very much limited central banks from delivering
the easings (in interest rates) that might have otherwise
occured," he said.
                                
 Japan's Nikkei share average <.N225> was 0.6 percent
higher, with Sony Corp <6758.T> one of the biggest gainers
after Goldman Sachs upgraded shares in the company to "buy."
Sony rose 2.3 percent but overall market trading volumes were
light.
                                
 Technology stocks also boosted Taiwan's TAIEX index <.TWII>
0.6 percent.
                                
 China Mobile <0941.HK> and China's third-largest oil
producer CNOOC <0883.HK> led Hong Kong's Hang Seng index <.HSI>
1.2 percent higher, one of the largest risers in the region.
                                
 The MSCI index of shares in the Asia-Pacific region outside
Japan <.MIAPJ0000PUS> added 0.3 percent, while a pan-Asian
index rose 0.7 percent <.MIAS00000PUS>, on track for the third
straight day of gains.
                                
 Shares in Thailand <.SETI> fell 0.9 percent after a tense
weekend street protest aimed at forcing the government of Prime
Minister Samak Sundaravej to step down. [ID:nBKK268711]
                                
 "Foreign investors are queing up to sell shares as the
political turbulence drags on," a dealer at BT Securities said.
                                
 Nervousness about an upcoming 10-year note auction in the
Japanese government bond market sent 10-year futures <2JGBv1>
to the lowest since August 2007.
                                
 The benchmark 10-year yield, which moves in the opposite
direction of the price, rose 2 basis points to 1.77 percent
<JP10YTN=JBTC>.
                                
 "With market sentiment still bearish, the supply this week
will be a challenge for investors as to how much they can
absorb," said Chotaro Morita, chief JGB strategist at Barclays
Capital in Tokyo.
                                
 The benchmark 10-year yield has surged about 50 basis
points since mid-March, when the U.S. Federal Reserve backed a
plan to bail out Bear Stearns and accepted a wider array of
collateral to provide liquidity to the market.
                                
 That marked a turning point for financial markets after a
crisis erupted in the U.S. subprime market and quickly spread,
though fallout has continued to be felt in some corners. The
chief executive of Bradford & Bingley Plc <BB.L>, Britain's
largest buy-to-let mortgage lender, quit on Sunday ahead of
what will likely be a 2008 profit warning on Monday.
                                
 INFLATION BREEDS UNCERTAINTY
                                
 Fears about inflation have investors growing impatient with
low yields in their portfolios. A report from Boston-based EPFR
Global, which tracks capital flows, showed a net $320 million
leaving global bond funds last week, the sixteenth-consecutive
week of outflows.
                                
 Data on Monday showed annual inflation in Australia rose to
4.5 percent, the highest in the 5-year history of the gauge and
well above the Reserve Bank of Australia's 2-3 percent target.
                                
 Long-term expectations for U.S. inflation soared to the
highest since April 1995, according to a report on Friday,
heightening the danger that perceptions of high prices will
become embedded within consumers.
                                
 Also, prices of soybeans and corn both rose last week,
driven in part by fears over supply because of weather concerns
and a strike by farmers in Argentina.
                                
 Crude oil prices were little changed with the July contract
<CLc1> easing 20 cents to $127.15 a barrel. However, oil prices
are still up by a third so far this year.
                                
 Oil traders are wary heading into the start of the Atlantic
hurricane season, which forecasters expect to be more active
than usual this year, threatening U.S. and Mexican oil
facilities.
                                
 The U.S. dollar rose against major currencies, tacking on
more gains after posting its first back-to-back monthly rise
since January 2007. The euro was down 0.1 percent at $1.5538
<EUR=> while the dollar was up 0.1 percent at 105.45 yen
<JPY=>.
                                
 A stronger dollar is often viewed as a positive for many
Asian economies that depend on U.S. consumer demand for their
export markets. Rising inflation in the world's largest economy
sparked some worries about the knock-on effect in Asia, but
evidence so far has been mixed.
                                
 South Korean exports last month jumped 27.2 percent
compared with a year earlier, the fastest pace since August
2004.
 (Additional reporting by Chikako Mogi in TOKYO)
 (Editing by Kim Coghill)