*

Tuesday's closely watched sale of 30-year bonds went

smoothly

*

Yields hit all-time peaks as fiscal dove Takaichi set to

be

premier

*

JGB yields pulled higher by overnight rises in US, French

yields

(Adds analyst comments, updates with 30-year auction result)

By Kevin Buckland

TOKYO, Oct 7 (Reuters) -

Japanese government bond yields retreated from record highs

on Tuesday after a closely watched sale of 30-year debt passed

smoothly, despite simmering concerns that the country's likely

next prime minister

will loosen fiscal restraints.

The smooth, if unspectacular, auction result allayed

market jitters

that had pushed 30-year JGB yields up 6

basis points (bps) to an all-time time high of 3.345% in early

trading.

After the announcement, those yields reversed course and

were down 3.5 bps at 3.25%. Bond yields rise when prices fall.

The 20-year JGB yield climbed 5 bps in

early trade to 2.74%, the highest since August 1999, but also

shed gains and were flat at 2.69% after the auction

announcement.

The 10-year yield, which had advanced 2.5

bps to 1.695% for the first time since July 2008, pulled back to

1.68%.

Long-dated JGB yields jumped sharply on Monday in the

immediate aftermath of fiscal dove Sanae Takaichi's victory in

the ruling Liberal Democratic Party's (LDP) weekend leadership

elections, setting her up to take over the premiership from

Shigeru Ishiba, a fiscal hawk.

Ironically, that yield surge was likely responsible for

the decent level of demand at Tuesday's sale, said Naomi

Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley

Securities.

"Yields rose so much ahead of the auction that it

invited dip buyers," she said.

But as to whether the climb in yields and concerns about

Takaichi's policies are overblown, "we just don't know yet,"

Muguruma said.

"Takaichi is pushing 'resposible fiscal expansion,' and

we don't know what that really means."

Additionally, a lot will depend on the outcome of

negotiations both within the LDP and with opposition parties in

forming the next government, Muguruma added.

Weak demand at long-term debt auctions earlier this year

triggered record spikes in yields that prompted the Ministry of

Finance to curtail issuance of 20-, 30-, and 40-year securities

- something that analysts and investors say has improved the

supply-demand balance.

A veteran lawmaker, Takaichi is a devotee of the

"Abenomics" stimulus policies of the late Shinzo Abe, who called

for loose fiscal settings and ultra-low interest rates to revive

the economy.

Her win saw swaps traders rapidly adjust expectations

for a Bank of Japan

interest rate hike

this month, with market-implied odds dropping to around 26%

currently from 37% on Friday, according to LSEG data.

Japan's two-year bond yield - which is

highly sensitive to monetary policy expectations - plunged as

much as 5 bps to a three-week low of 0.89% on Monday, but undid

part of that in the current session with a 1.5 bps rise to

0.91%.

The five-year JGB yield added 2 bps to

1.21%, undoing the bulk of Monday's slide.

Japanese yields were under broad upward pressure on

Tuesday following climbs in global yields overnight,

particularly for French OATs following the rapid

collapse

of the new government there, and for Treasuries as the U.S.

government

shutdown

drags on.

($1 = 150.42 yen)