July 25 (Reuters) - Japanese government bond yields recovered after plunging to their lowest in months on Monday, as investors pared their bets on policy tightening at home and hedged the risk of a global economic slowdown.

The benchmark 10-year JGB yield fell 3.5 basis points to 0.178% in morning trading, its lowest since March 14, before settling at 0.200%.

The five-year yield fell into negative territory, dropping 1 basis point to minus 0.005%.

Yields have dropped steadily since mid-June, when bets that the Bank of Japan will be forced to join its hawkish global peers and tweak its yield-curve-control policy were at their extreme. Ten-year yields breached the BOJ's target to rise as far as 0.265% in June, forcing the central bank to spend a record amount of yen defending the band.

“We are still holding our short position in JGBs – yields have edged away from the upper band and the yen has had some respite," said Kellie Wood, deputy head of fixed income for Australia at Schroders.

"However, such relief could be short-lived as sticky and broad-based inflation will likely put a floor under global interest rates, and risks of renewed upward pressure on yields remain," Wood added. "We maintain our short duration bias for longer maturity JGBs.”

Demand for JGBs heightened as Japan's Nikkei share average snapped last week's winning streak after data showed U.S. business activity had contracted for the first time in nearly two years.

"The PMI results contradicted expectations that a shift in demand to services was a reason behind the weakness in goods," said Toru Moritani, chief market economist at Sumitomo Mitsui Banking Corp.

"The expectations that consumption would bounce back at least for the summer leisure season have also retreated."

Yields on longer-term notes fell across the board.

The 20-year yield fell 1 basis point to 0.850%, the 30-year yield fell 2.5 basis points to 1.200%, and the 40-year yield fell 1.5 basis points to 1.410%.

The two-year yield was flat at -0.080%.

Benchmark 10-year JGB futures rose 0.35 point to 150.1. (Reporting by Sam Byford and Tokyo markets team; Additional reporting by Tom Westbrook in Singapore Editing by)