JGBs slip as Nikkei hits 8-mth high, US auction eyed

* Longer-dated JGBs, futures drop as Nikkei climbs

* 2-yr JGBs rise after rally in shorter-dated U.S. Treasuries

* U.S. 10-year auction later in the day eyed for incentive

* 2-year/20-year spread widens by 2.5 bps to 180.5 bps

By Shinichi Saoshiro

TOKYO, June 10 (Reuters) - Japanese government bonds retreated on Wednesday as the Nikkei share average advanced to an eight-month high on hopes for an economic recovery, eroding the safe-haven appeal of debt.

Two-year JGBs bucked the trend and eked out gains after U.S. Treasuries of similar maturities rallied the previous day following a strong three-year auction.

Data on Wednesday showed core Japanese machinery orders unexpectedly slid 5.4 percent in April, but economists said the news did not alter the view that the economy may be over the worst of its slump. [ID:nT134095]

"JGBs were forced lower by bullish stocks. The market was unable to get much lift from the weak machinery orders data, either," said Takafumi Yamawaki, a senior fixed-income strategist at BNP Paribas.

"Strong bargain hunting demand exists at the 1.550 percent yield on the 10-years, but selling by investors could quickly gather pace once the yield breaks above that level."

The benchmark 10-year yield JP10YTN=JBTC rose to a seven-month high of 1.550 percent the previous week after the market was hurt by a combination of rising Treasury yields, rising stocks and concerns about extra supply.

The yield curve steepened on Wednesday as longer-dated JGB yields edged up with participants eyeing how the U.S. Treasury market handles the week's two remaining auctions --a $19 billion 10-year note tender on Wednesday and an $11 billion 30-year bond offering on Thursday.

The spread between the two- and 20-year yields widened by 2.5 basis points to 180.5 basis points, edging closer to a 3-½ year high of 183 basis points reached earlier in the month.

"Hardly anyone believes the Bank of Japan will hike interest rates soon, but the JGB market will not react positively if it sees U.S. yields spike on a poorly received auction," said Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley.

September 10-year futures 2JGBv1, which replaced June as the lead contract on Wednesday, shed 0.20 point to 135.65.

The two-year yield JP2YTN=JBTC fell 1 basis point to 0.370 percent after rising to 0.380 percent the previous day, its highest in nearly a month.

The five-year yield JP5YTN=JBTC edged up 0.5 basis point to 0.850 percent before an auction of the same maturity on Thursday.

The benchmark 10-year yield JP10YTN=JBTC rose 1 basis point to 1.535 percent after hitting 1.545 percent.

The 20-year yield JP20YTN=JBTC climbed 1.5 basis points to 2.175 percent.

The 30-year yield JP30YTN=JBTC was up 1 basis point at 2.285 percent.

The Nikkei .N225 stock average jumped 2.1 percent to its highest close since Oct. 7, as global economic recovery hopes helped to counteract the fall in Japanese machinery orders. [.N]

Short-dated Treasuries rallied on Tuesday, pulling yields back from recent seven-month highs reached on views the Federal Reserve might raise interest rates sooner than expected, after a solid auction of three-year notes helped reduce supply concerns. [US/] (Reporting by Shinichi Saoshiro; Editing by Chris Gallagher)