By Kevin Plumberg HONG KONG (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 was 0.6 percent higher, with Sony Corp 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 0.6 percent. China Mobile and China's third-largest oil producer CNOOC led Hong Kong's Hang Seng index 1.2 percent higher, one of the largest risers in the region. The MSCI index of shares in the Asia-Pacific region outside Japan added 0.3 percent, while a pan-Asian index rose 0.7 percent , on track for the third straight day of gains. Shares in Thailand fell 0.9 percent after a tense weekend street protest aimed at forcing the government of Prime Minister Samak Sundaravej to step down. "Foreign investors are queuing 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 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 "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, 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 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 while the dollar was up 0.1 percent at 105.45 yen 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. | 
