Long-term JGBs rally as solid auction demand calms fiscal, election jitters

By Rocky Swift

TOKYO, July 10 (Reuters) - Long-term Japanese government bonds (JGBs) rallied on Thursday as solid demand at a debt auction counterbalanced concerns over fiscal deficits and an upcoming election.

Prices for 20- and 30-year JGBs sank earlier this week, driving yields sharply higher, on speculation the government's ruling coalition may lose its majority in the upper house election on July 20.

The potential defeat could give power to opposition parties that have pledged in their campaign platforms to cut or abolish the sales tax.

The Ministry of Finance this month trimmed its issuance of super-long bonds in response to poor demand at auctions and a rise in yields to record levels in May.

The ministry's sale of 20-year debt on Thursday had a bid-to-cover ratio of 3.15, the highest since the March auction and compared with 3.11 in June, indicating higher demand. The auction tail of 0.18 yen was shortest since January, also indicating strong uptake by buyers.

"The 20-year JGB auction slid across the finish line in decent shape," said Shoki Omori, chief desk strategist at Mizuho Securities. "Unless a political, diplomatic, or geopolitical storm suddenly blows in, a brutal sell-off feels unlikely."

Futures on benchmark 10-year debt JGBc1 rose after the auction.

The 20-year JGB yield JP20YTN=JBTC fell 2.5 basis points (bps) to 2.485%. The 30-year yield JP30YTN=JBTC slid 4.5 bps to 3.01%.

The benchmark 10-year yield JP10YTN=JBTC edged down 1.5 bps to 1.485%.