Record yields, easing pressure on PM Ishiba fuel Japanese bonds rally

• Weak demand for two-year notes at auction raises concerns
• BOJ's Nakagawa warns of U.S. tariff policy impact
• Bonds demand boosted as PM Ishiba's position stabilises

By Rocky Swift and Junko Fujita

TOKYO, Aug 28 (Reuters) - Japanese government bonds (JGBs) rallied on Thursday as yields at historic highs drew in buyers and political pressure on the nation's fiscally conservative prime minister appeared to ease.

Two-year notes pared gains after a debt auction showed the weakest demand in almost 16 years.

Bond yields move inversely to prices.

JGBs have skidded in recent months on mounting concerns over the government's debt levels and deficit spending. Selling intensified after an electoral drubbing last month for the political coalition of Prime Minister Shigeru Ishiba.

Ishiba insisted on staying on in the job, and domestic media reports this week indicated that momentum was waning for an early leadership vote within his Liberal Democratic Party (LDP).

"It looks more likely that the LDP won't bring forward its presidential election," said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.

Improving prospects for Ishiba prompted investors to swoop in on recently pummelled 30-year bonds, he added, while dovish comments from Bank of Japan board member Junko Nakagawa lifted sentiment.

On Thursday, Nakagawa said persistent uncertainty stemming from U.S. tariff policies could weigh on business and household sentiment.

The 30-year JGB yield JP30YTN=JBTC fell 4.5 basis points (bps) to 3.185% from the previous session, when it touched an unprecedented 3.35%.

The benchmark 10-year yield JP10YTN=JBTC fell 0.5 bp to 1.62%, easing from Wednesday's peak of 1.63%, a 17-year high.

The 20-year yield JP20YTN=JBTC fell 3 bps to 2.620%. The two-year yield JP2YTN=JBTC was flat at 0.86% after touching 0.845% earlier. A securities auction received bids worth 2.84 times the amount sold, the lowest ratio since September 2009.

"This does raise concerns about upcoming auctions in general, namely the 10-year and 30-year, which have been recording historical high yields," said Shoki Omori, chief desk strategist at Mizuho Securities.