Japan's 30-year bond yields rise to record as auction tests demand

By Rocky Swift and Junko Fujita

TOKYO, Dec 4 (Reuters) - Record-high yields on 30-year Japanese bonds helped support demand at an auction of the debt on Thursday at a time when the government has planned massive debt-fuelled stimulus.

The 30-year Japanese government bond (JGB) yield climbed to an unprecedented 3.445% before the debt sale. The benchmark 10-year yield JP10YTN=JBTC jumped 4.5 basis points (bps) to 1.935%, the highest since July 2007.

Long-dated bonds, which are sensitive to fiscal worries, have been under pressure following the announcement of a spending plan by Prime Minister Sanae Takaichi that will be funded largely by new borrowing. Shorter-term notes, those most sensitive to central bank rates, were sold off on expectations of Bank of Japan rate hikes.

The Ministry of Finance's (MoF) sale of about 700 billion yen ($4.51 billion) in 30-year JGBs had the highest bid-to-cover ratio, a measure of demand, since May 2019.

The 30-year JGB rallied after the auction, with the yield falling 3 bps to 3.39%.

The high yields led to strong demand among investors betting that rate levels may have topped out, according to Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

The government has shown its concerns over the sharp increase in JGB yields, with Chief Cabinet Secretary Minoru Kihara reiterating on Thursday that officials were closely watching market moves.

The BOJ is likely to raise interest rates at its meeting this month with the government expected to tolerate such a decision, sources told Reuters.

The 20-year yield JP20YTN=JBTC reached 2.94%, the highest since June 1999. The five-year yield JP5YTN=JBTC rose 2.5 bps to 1.41%, a level not seen since June 2008.

Investors expect the MoF will suggest cutting issuance of 30-year debt next fiscal year when it meets with primary dealers next week, according to Takashi Fujiwara, chief fund manager at Resona Asset Management's fixed income division.

Meanwhile, the BOJ may reduce purchases of JGBs in the 10- to 25-year sector, while maintaining buying support of the 30-year, he added.

Issuance of 20-year bonds will probably be unchanged, but "sales of 10-year JGBs will likely increase," Fujiwara said.

($1 = 155.1700 yen)