JGB yields slip tracking US yields; market cautious ahead of domestic election

By Brigid Riley

TOKYO, Oct 25 (Reuters) - Japanese government bond yields edged lower on Friday, tracking a fall in U.S. Treasury yields, although the declines were capped as the market remained cautious about a close-call domestic election this weekend.

The 10-year JGB yield was last down 0.5 basis point at 0.95%, while 10-year JGB futures rose 0.06 points to 144.02 yen.

Benchmark U.S. 10-year Treasury yield fell from a three-month high on Thursday after reaching levels that drew buying interest, putting downward pressure on JGB yields.

But moves were subdued on the last day of trade before votes are cast and counted in Japan's lower house election on Oct. 27.

Depending on how many seats the ruling Liberal Democratic Party loses, it could be forced into power-sharing deals with opposition parties.

Japan's markets are "fearful" that the LDP-Komeito coalition will lose the majority, with the bond market worried that could lead to bigger spending, said Naka Matsuzawa, chief macro strategist at Nomura Securities.

"When the coalition needs to find another partner, they are in general more fiscally expansionary," he said.

That concern had caused superlong JGB yields, which tend to be the most sensitive to fiscal risk premium, to rise earlier this week.

The risk of ending up with a minority coalition government is also raising concerns that it could complicate the Bank of Japan's monetary policy outlook.

The BOJ is expected to stand pat at its monetary policy meeting next week, although it will probably signal a less dovish policy outlook.

Inflation data for Japan's capital in October released on Friday showed core inflation dipped below the central bank's 2% target for the first time in five months.

The 20-year JGB yield slid 1.5 bps to 1.78%, while the 30-year yield fell 1 bp to 2.19%.

The two-year yield and five-year yield were both flat at 0.445% and 0.58%, respectively. (Reporting by Brigid Riley; Editing by Varun H K)