Japan bonds tread water as wary investors await weekend election

By Kevin Buckland

TOKYO, July 17 (Reuters) - Japanese government bonds held steady on Thursday as the market turned calm in the final run-up to potentially pivotal upper house elections, following a selloff earlier in the week that sent long-term yields to record peaks.

Recent polls suggest the ruling coalition is seen as increasingly unlikely to retain its majority, ceding more power to opposition parties backing consumption tax cuts as a way to ease the burden from rising consumer prices.

Prime Minister Shigeru Ishiba's administration has so far eschewed that option in favour of cash handouts.

The fiscal implications of a defeat for Ishiba in this Sunday's vote saw 30-year yields JP30YTN=JBTC surge to a record peak of 3.20% on Tuesday, while 20-year yields JP20YTN=JBTC leapt to the highest since November 1999 at 2.65%.

Those yields retreated sharply on Wednesday, though, and in the latest session, the 20-year yield remained flat at 2.57%, while the 30-year yield increased by 0.5 basis point (bp) to 3.07%.

The 10-year yield JP10YTN=JBTC eased 0.5 bp to 1.565%. It vaulted to its highest level since October 2008 at 1.595% earlier this week.

"The possibility of the ruling coalition losing its majority in this weekend's upper house election has already been mostly priced in, but it is unclear what the coalition framework will be after that," said Miki Den, a senior rates strategist at SMBC Nikko Securities.

"Investors are reluctant to take on new positions."

Benchmark 10-year JGB futures 2JGBv1 were flat at 137.96, after pushing to the lowest since March 28 at 137.70 on Wednesday. Bond yields move inversely to prices.

The five-year JGB yield JP5YTN=JBTC and two-year yield JP2YTN-JBTC each declined by 0.5 bp to 1.075% and 0.78%, respectively.