Japan's 30-year bond auction provides early test of 'Takaichi trade'

By Rocky Swift and Junko Fujita

TOKYO, Oct 7 (Reuters) - An auction of 30-year Japanese debt on Tuesday offers an early test of investor tolerance for what is expected to be more expansionist spending and monetary policies under the premiership of Sanae Takaichi.

The 30-year Japanese government bond (JGB) price plunged on Monday, sending the yield to a record high, after Takaichi was victorious in a weekend ruling party election that positions her to become the next prime minister.

"Concerns about the outlook of super-long dated bonds are back now, with Takaichi adding fuel to a sell-off," said Masayuki Koguchi, the executive chief fund manager at Mitsubishi UFJ Asset Management. "In this environment, investors would not want to buy 30-year bonds."

The Ministry of Finance is due to sell about 700 billion yen ($4.66 billion) in 30-year securities. Weak demand at long-term debt auctions earlier this year spooked the market, causing a spike in yields and prompting the ministry to curtail issuance of 20-, 30-, and 40-year securities.

Takaichi was considered to be the most dovish among five candidates in the Liberal Democratic Party race to replace hawkish Prime Minister Shigeru Ishiba.

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. During the campaign, she appeared to moderate her stance, leaving sales tax cuts out of her platform and staying mostly mum on the Bank of Japan.

The 30-year tenor has been under particular pressure in global debt markets in recent months as investors grew more wary about widening deficits in already highly indebted nations.

Japan's debt pile is the biggest in the developed world, at more than two times the nation's gross domestic product. The JGB market has also been undercut by slowing demand among life insurers and other traditional buyers, as well as a gradual reduction in purchases by the BOJ.

Takaichi and farm minister Shinjiro Koizumi were seen as the frontrunners in the LDP race. The so-called "Takaichi trade" was long on stocks and bearish long-term JGBs, whereas the "Koizumi trade" involved selling mid-term bonds and buying super-long dated securities.

Going into Saturday's showdown, long-term yields fell while shorter rates increased. The resultant flattening of the yield curve reflected bets on both a Koizumi victory and that the BOJ would raise rates as early as this month.

That trend reversed violently on Monday, with attention now focusing on who Takaichi may name to key roles in her government.

Takaichi may have to rein in her spending ambitions, as media reported she is slated to recruit LDP veterans into the party's key positions and make concessions to other parties, said Ryoma Nagatomo, a senior fund manager at Norinchukin Zenkyoren Asset Management.

"Yields on super-long dated bonds are too high now, and we can't see reasons to justify these levels," Nagatomo said.

"We need to see how certain things turn out, such as who the LDP will form a coalition with, until we start buying super-long bonds."

($1 = 150.2200 yen)