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Global 30-year yields surge to elevated 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

(Updates prices in paragraph 8)

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 fiscal deficits.

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 (MOF) aims to sell about 700 billion yen ($4.75 billion)

of 30-year paper.

The auction's results are expected around 12.35 p.m. Tokyo

time. Bond yields and prices move in opposite directions.

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

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 effects 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."

JGBs gained in early trading on Thursday, following a global

rally in government debt overnight. The 30-year yield slid to

3.265%, while the benchmark 10-year yield fell to

1.61% from 1.64% on Wednesday that was its highest since July

2008.

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 primary dealers about another reduction of

long-dated bond sales.

POLITICAL RISK

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. But 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 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 an improvement in the economy, reflected in a

recent run-up in Japanese stock 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)