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Fiscal worries send super long bond yields higher

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Japanese state borrowing costs hit record highs

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UK 30-year gilt yields rise to new post-1998 peak

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Gold races above $3,500 amid safe-haven scarcity

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Sterling, yen pressured by debt market woes

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(Updates prices, adds commentary)

By Naomi Rovnick and Rocky Swift

LONDON, TOKYO, Sept 3 (Reuters) - A global slide in

long-dated bonds extended on Wednesday, sending Japan's

government borrowing costs to record highs, as mounting concerns

over government debt sustainability and long-term inflation also

rattled investors in Europe.

Spot gold hit all-time high of $3,546.99 earlier in

the session as the rush out of long-term government debt,

traditionally considered low-risk, sparked a hunt for

alternative safe-haven assets.

The 30-year Japanese government bond (JGB) yield hit an

unprecedented 3.255% on Wednesday morning, following a run-up in

similarly dated UK gilts and U.S. Treasuries

on Tuesday.

"Several factors are likely playing together here. The usual

suspects are the uncertainty on how inflation might come back

again, and the fiscal concerns given the elevated debt levels of

some major economies," said Dario Messi, head of fixed income

research at Julius Baer.

"There are also some idiosyncratic and country-specific

elements (i.e. Japan or France) weighing on government bond

prices."

The 30-year U.S. Treasury yield briefly rose above 5% in the

Asian trading session on Wednesday and last stood at 4.987%, and

with yields at this level, investors are starting to watch for

spillovers into other asset classes.

"The 5% level is going to be impactful to equities," said

Josh Chastant, portfolio manager, public markets at GuideStone

Funds.

"And you are starting to see some of that pressure, but it

also means that we are getting to attractive levels on bonds."

As European bond markets began trading, Germany's 30-year

yield was little changed at 3.413%, close to its

highest level in 14 years, and British 30-year gilt yields rose

6 basis points to a fresh post-1998 high of 5.752%, before

recovering.

These 30-year tenors have been soaring around the world as

investors fret about the scale of state borrowing and less

demand for long-dated bonds from investors around the world.

The gap between two-year and 30-year U.S. government bond

yields stands at about 133 bps, around its

highest since December 2021, while the comparable measure in

Britain is the highest since 2017.

The global trend would likely feed on itself, analysts said,

because higher yields in Japan meant Japanese savers who had for

decades looked to overseas assets for income now had fewer

reasons to buy non-domestic government debt.

"Global bond markets no longer benefit from the Japanese

hunt for yield," L&G Asia head of investment strategy Ben

Bennett, said.

"It's a perfect storm for long-dated bonds and a headache

for governments."

British finance minister Rachel Reeves is expected to raise

taxes in her autumn budget to remain in line with her fiscal

targets, while in France Prime Minister Francois Bayrou looks

set to lose a confidence vote as opposition parties balk at his

spending cuts.

RIPPLE EFFECTS

Britain's pound fell to a four-week low against the dollar

of $1.3334 and Japan's yen was a touch softer

at 148.60 per dollar after sliding 0.8% in the previous session.

European and U.S. stock markets remained unscathed as

traders pinned their hopes on an anticipated U.S. rate cut, with

Europe's Stoxx up 0.4% in early dealings GMT and U.S.

S&P 500 futures about 0.4% higher.

But Japan's Nikkei stock average fell 0.69% as

worries about the nation's financial health and political

stability increased with government departments presenting

record budget requests.

Senior aides to Prime Minster Shigeru Ishiba, including

Secretary-General Hiroshi Moriyama, also offered to resign from

key leadership positions to take responsibility for the party's

defeat in the July 20 upper house election.

MSCI's broadest index of Asia-Pacific shares outside Japan

was down 0.4%.

TARIFF TREMORS

Attention now turns to services data in Europe early on

Wednesday for indications of how countries are weathering the

unpredictable tariff policies of U.S. President Donald Trump.

Trump on Tuesday said his administration will ask the

Supreme Court for an expedited ruling on tariffs that an appeals

court found illegal last week. The court allowed for the tariffs

to stay in place until October 14.

U.S. manufacturing contracted for a sixth straight month in

August as factories grappled with the impact of import tariffs,

data showed on Tuesday, helping to drive Brent crude oil

0.5% lower to $68.80 a barrel on Wednesday morning.

U.S. nonfarm payrolls on Friday will be preceded by data on job

openings and private payrolls, offering an update on the labour

market that has become the focus of policy debate at the Fed.

Markets widely expect the Fed to lower interest rates later

this month, pricing in an 89% chance of a 25-basis-point cut.