JGB yields surge toward May highs on election-led fiscal concerns

By Rocky Swift

TOKYO, July 14 (Reuters) - Yields on Japanese government bonds (JGBs) surged on Monday, toward historic levels last seen in May, as concerns grew that an upcoming election could pave the way for increased fiscal spending.

Prices for long-dated debt continued their decline from last week, driving yields sharply higher, as prospects dimmed that Prime Minister Shigeru Ishiba's ruling coalition will retain its majority in the upper house after a vote on July 20.

A potential defeat could empower opposition parties that have pledged in their campaign platforms to cut or abolish the sales tax. Mounting fiscal concerns and soft demand at debt auctions triggered a surge in super-long yields to record levels in late May. In response, the Ministry of Finance curtailed its issuance super-long JGBs, starting with sales this month.

"Broadening of the ruling coalition would quite likely increase the probability of a reduction in the consumption tax rate," Yusuke Matsuo, senior market economist for Mizuho Securities, wrote in a note to clients.

That in turn would put "upward pressure on super-long interest rates in a climate where global fiscal risk has already been very much on the minds of bond market participants."

The 10-year JGB yield JP10YTN=JBTC rose 7 basis points (bps) to 1.57%, its highest since May 22. The 20-year yield JP20YTN=JBTC rose 7 bps to 2.57%, closing in on the 2.6% level seen on May 23 that was the highest since October 2000.

The 30-year yield JP30YTN=JBTC was up 7.5 basis points to 3.115%, nearing the all-time high of 3.185% hit on May 21.