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Global 30-year yields surge to historic levels on fiscal

concerns

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Japan's MOF reduced long-dated issuance to cap yields

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Political shifts in Tokyo may drive risk premia higher

By Rocky Swift

TOKYO, Sept 4 (Reuters) - An auction of super-long

Japanese government bonds on Thursday serves as the latest test

for global debt markets nervous about growing deficits and debt

obligations.

Thirty-year bonds have become a pain point for Japan, the

United States, and across Europe as investors demand ever higher

yields to hold debt for longer with no signs of improvement in

the sovereigns' balance sheets.

Yields on 30-year Japanese government bonds (JGBs) shot up

8.5 basis points to a record 3.285% on Wednesday, after scaling

a series of peaks in recent months. On Thursday, the Ministry of

Finance aims to sell about 700 billion yen ($4.75 billion) of

30-year paper.

Japan is often looked to as a test case for developed

countries in how to cope with an ageing population, massive

amounts of debt to service, and a need to wean the economy off

of central bank stimulus. Although JGB yields have risen sharply

of late, they remain low relative to other major sovereign

issuers.

The JGB market has been at the whim of political uncertainty

at home and the gravitational effect of an increase in long-term

yields across the globe. Yields on 30-year debt recently hit a

seven-week high in the U.S., a more than 16-year high in

France, a 14-year peak in Germany, and levels not seen since

1998 in Britain.

"Not only Japan but in Europe and the U.S., people have a

steepening bias right now," said Toshinobu Chiba, a Tokyo-based

fund manager at Simplex Asset Management. "People don't want to

take that longer duration risk."

JGB yields began to surge in late May, particularly on the

longer end of the curve, as diminishing demand among life

insurers and other traditional buyers led to poor results at

debt auctions.

To cap yields and help reset the supply-demand balance, the

MOF reduced issuance of some long-dated tenors, starting in

July. Market sources told Reuters last week the ministry has

been sounding out primarily dealers about another reduction of

long-dated bond sales.

The JGB market was dealt another blow in mid-July when the

coalition of fiscal hawk Prime Minister Shigeru Ishiba was

clobbered in upper house elections. Outsider parties campaigning

on tax cuts and increased spending gained seats, and speculation

has swirled that Ishiba's Liberal Democratic Party will call a

leadership vote and choose a more spendthrift leader.

"We think risk premia will be politically driven and expect

them to move higher if concerns about expansionary fiscal policy

intensify and decline if those concerns ease," Takahiro Otsuka,

senior fixed income strategist at Mitsubishi UFJ Morgan Stanley

Securities, wrote in a note.

The 30-year JGB yield may drift higher to about 3.8% if the

LDP calls a leadership vote, Simplex's Chiba said.

Ishiba has pledged to stay on, and even with no immediate

political shake-ups, the nation's budget requests for the next

fiscal year amounted to a record for the third straight year,

the finance ministry said on Wednesday.

And the eventual amount could go even higher, as local media

reported that Ishiba plans to ask ministers to compile an

economic stimulus package to be funded by an extra budget.

All that will weigh on traders' minds as the MOF's 30-year

debt auction on Thursday approaches. The previous two auctions

saw relatively healthy demand, based on the ratios of total bids

to the amount of bonds on sale.

But signs of improvement in the economy, reflected in a

recent run-up in Japanese share indexes to record levels, add

another headwind for JGBs, said Naka Matsuzawa, chief macro

strategist at Nomura Securities.

"It's kind of hard to resist that trend until the stock

market stops rising," Matsuzawa said. "I think that the next

auction will still remain rather weak as there's no determined

buyer at this point."

($1 = 147.3300 yen)