JGBs track US bonds higher; market cautious about super-long yields

By Junko Fujita

TOKYO, Sept 5 (Reuters) - Japanese government bonds rose on Friday, tracking the climb in U.S. Treasury bonds following bets of a Federal Reserve rate cut in September, but the market remained cautious about domestic super-long bond yields.

Japan's 30-year JGB yield JP30YTN=JBTC fell as much as 3.5 basis points (bps) to 3.23%, retreating from a record high of 3.285% scaled earlier this week.

Yields move inversely to prices.

The auction for the 30-year bonds in the previous session was smooth, despite concerns over weakening demand for the super-long-dated debts as Japan's political scenario remains uncertain.

However, the yield for lowest accepted price for the 30-year bond auction was at record high of 3.277%, indicating demand for a higher premium for the super-long bonds, strategists said.

On Monday, lawmakers of Japan's ruling party will vote whether to hold an extraordinary leadership election that could oust embattled premier Shigeru Ishiba, which will have a significant impact on the world's fourth largest economy.

"The stronger-than-expected auction did not prompt investors to buy 30-year bonds actively today, as the yield still hovers at a record level," said Keisuke Tsuruta, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The yields could rise further as foreigners, who were attracted by the higher premium on longer-dated bonds and widening spreads between the 10-year bond yields, are active buyers.

The gap in yields between the 10-year bonds and 30-year bonds was 166 bps on Friday, a record high level.

Unlike life insurers, who tend to hold super-long bonds for a longer term, foreigners tend to sell the bonds if there is a cue.

If there is a sell-off, investors who have a flattening position may be forced to follow suit, which could send the yields even higher, said Tsuruta.