JGB futures jump as auction highlights good demand

* Investors pick up cash bonds after Monday's sell-off

* Fukuda resignation not seen as big bond market factor yet

* Ten-year auction highlights steady demand

* BOJ's Shirakawa says hard to avoid slowdown

By Rika Otsuka

TOKYO, Sept 2 (Reuters) - Japanese government bond futures jumped on Tuesday, rising towards a four-month peak, as market players covered short positions and shrugged off the surprise resignation of Prime Minister Yasuo Fukuda.

Investors rushed to buy cash bonds a day after a hefty bond sell-off boosted the benchmark 10-year yield to near the 1.5 percent level, traders said. A solid auction of the maturity during the day also highlighted steady demand.

The market reacted little to a sudden announcement by Fukuda late Monday that he had decided to step down to break a political deadlock. [ID:nT111398]

"Fukuda's resignation announcement came as a total surprise," said Chotaro Morita, chief fixed-income strategist at Barclays Capital. "But that was about it and investors found no incentive to buy or sell JGBs in the short term."

But some analysts said Fukuda's departure is seen clouding the reform outlook and potentially spurring debt-funded spending in the longer term. An increase in government debt issuance to fund steps to stimulate the slowing economy would be negative for JGBs. [ID:nT114525]

"The government is seen moving towards more bond issuance, for sure," said Atsushi Ito, a JGB strategist at Morgan Stanley. "At the same time, it is doubtful that such a step would lift bond yields."

September futures 2JGBv1 climbed 0.49 point to 138.10, rising back towards a four-month peak of 138.80 hit last week in evening trade.

Analysts said the outlook for the global and Japanese economies were the main concerns for investors, and the worries about a further slowdown are behind the eagerness to buy bonds around current yield levels.

Bank of Japan Governor Masaaki Shirakawa said on Tuesday it will be hard to avoid a slowdown in the world economy, although historically growth remains at a high level. [ID:nTKU003047]

The benchmark 10-year yield JP10YTN=JBTC fell 1.5 basis points to 1.460 percent, holding near a four-month low of 1.400 percent hit only last Friday.

At the Ministry of Finance's 1.9 trillion yen ($17.6 billion) auction of benchmark 10-year bonds, bids totalled 2.66 times the amount on offer -- up from 2.57 at the previous month's sale and above the average of 2.47 over the past year.

The coupon was set at 1.5 percent for the No. 296 issue, unchanged from last month's auction of the maturity.

Demand for 10-year bonds was underpinned in part by investors needing to reinvest funds from a large amount of maturing bonds this month, analysts said.

The two-year yield JP2YTN=JBTC edged down a basis point to 0.725 percent, while the 20-year yield JP20YTN=JBTC fell 2 basis points to 2.110 percent. ($1=108.08 Yen) (Additional reporting by Eric Burroughs)