Superlong JGBs gain on strong 30-year auction

* New 30-years meet with strong demand despite low coupon

* 10-yr/30-yr spread tightens by 2.5 bps to 87.5 bps

* Steepening positions unwound, adds to flattening bias

* Two- to 10-year JGBs weighed down on such unwinding

By Shinichi Saoshiro

TOKYO, Oct 8 (Reuters) - Superlong Japanese government bonds gained on Thursday, with the 30-year yield hitting a three-month low, as an auction of the maturity drew strong demand despite a coupon that was the lowest in over five years.

The yield curve flattened as 20- and 30-year JGB yields, which had recently lagged the declines in yields of shorter-dated maturities, fell while yields of shorter maturities were flat to a touch higher.

Although the 2.2 percent coupon was the lowest since the February 2004 tender, market players said the 600 billion yen ($6.8 billion) 30-year sale attracted strong demand from dealers covering short positions and domestic life insurers looking to extend the durations of their bond assets to match their liabilities.

The bid-to-cover ratio, a gauge of demand, was unchanged from the previous tender's 3.27 but the lowest price was significantly higher than expected. [ID:nMOFJH5004]

The dwindling attraction of investing in foreign bonds in the wake of a global decline in debt yields was also seen as enhancing demand for 30-year JGBs.

Analysts also said the superlongs, particularly the 30-years, appeared cheap compared with most other maturities.

The 10-year/30-year yield spread had widened to a one-month high of around 92 basis points at the start of the week before tightening by 2.5 basis points to 87.5 basis points on Thursday.

"Yields up to the 10-years have broken below significant levels recently, but the superlongs have been the exception as they have been moving within the same range for the last several months," said Akito Fukunaga, a fixed-income strategist at Credit Suisse.

While 30- and 20-year yields fell to three-month lows on Thursday, over the past month two- and five-year yields have already fallen to four-year lows and the benchmark 10-year yield has dropped to an eight-month low.

"It now remains to be seen whether the bullish momentum can be retained in superlongs," says Takafumi Yamawaki, a senior fixed-income strategist at BNP Paribas Securities.

"Demand from life insurers is definitely preventing the sector's yields from rising but it may not be enough to push yields significantly lower."

December 10-year futures dipped 0.02 point to 139.35 2JGBv1 after brushing 139.61.

Some investors unwound steepening positions, which involves selling shorter-dated debt and buying superlong bonds, in the wake of the strong 30-year auction and added flattening pressure while forcing futures to surrender gains, market players said.

The 30-year yield JP30YTN=JBTC dropped 2.5 basis points to 2.135 percent after touching 2.115 percent, a three-month low. The 20-year yield declined 0.5 basis point to 2.000 percent after touching 1.980 percent, also a three-month trough.

The benchmark 10-year yield JP10YTN=JBTC was unchanged at 1.260 percent after hitting 1.245 percent. It fell to an eight-month low of 1.240 percent at the beginning of October.

The five-year yield JP5YTN=JBTC edged up 1 basis point to 0.585 percent. The two-year yield JP2YTN=JBTC climbed 1 basis point to 0.245 percent. (Reporting by Shinichi Saoshiro; Editing by Chris Gallagher)