JGB 10-yr yield hits 4-½ mth high before auctions

* Concerns over supply increase continue to weigh on JGBs

* Investors cautious before five-, 40-year auctions this week

* Two-year/10-year spread hits new 3-½ year high

By Shinichi Saoshiro

TOKYO, Nov 9 (Reuters) - Japanese government bond prices fell on Monday, with the benchmark 10-year yield hitting a 4-½ month high, as investors braced for two debt auctions this week after fiscal worries led to only lukewarm support for a bond sale last week.

A rebound in Tokyo stocks from an early fall also dampened the appeal of JGBs.

"JGBs were hurt by the Nikkei's bounce. The slip in bond futures weighed on cash maturities near the underlying JGBs like the 10-years," said Shinji Ebihara, a quantitative analyst at Mizuho Securities.

The JGB market has been hounded by supply concerns for the past month as it braces for issuance increases to offset low demand for retail bonds, fund an expected tax revenue shortfall and help finance the country's spending plans for the next fiscal year.

These supply worries have hit the 10-year zone particularly hard. The maturity does not have the same kind of core buy-and-hold clientele as other points on the yield curve, though banks and other investors are active in it.

The 10-year yield's rise to a 4-½ month high on Monday caused the two-year/10-year yield spread to hit a fresh 3-½ year high of 120.5 basis points on Monday.

The JGB short-end has been better supported by expectations that the Bank of Japan will maintain very low interest rates at least through 2010.

FIVE-YEAR SALE AWAITED

Bond investors were cautious ahead of a 40-year tender on Tuesday and a five-year sale on Thursday after an auction of 10-year bonds the previous week drew lacklustre demand on concerns over a potential supply increase due to a ballooning government deficit.

The first round of increased issuance is already underway after the Ministry of Finance said last month it would increase its issuance of JGBs to the market through regular auctions by 2.1 trillion yen ($23 billion) to 132.3 trillion yen for this fiscal year to offset weak demand for JGBs among retail investors. [ID:nT78079]

The five-year auction is in the spotlight, since it will be the first to be carried out with an increased issuance amount. The ministry is increasing the monthly issuance amount of five-year debt by 100 billion yen to 2.4 trillion yen.

Investors are preparing for the possibility of further increases in debt issuance this fiscal year to offset an expected tax revenue shortfall. They are also awaiting details on the size of debt issuance for the next fiscal year starting in April. [ID:nT259930]

The cost of insuring against default in government debt has risen to its highest level since April. Five-year credit default swaps JPGV5YJPAC=MP on Japan's sovereign debt have risen to about 66 basis points from about 43 basis points two weeks ago, although they are still below a record of 130 touched in February.

December 10-year JGB futures 2JGBv1 were down 0.18 point at 137.38 after hitting a fresh three-month low of 137.29.

The two-year yield was unchanged at 0.265 percent JP2YTN=JBTC, while the five-year yield rose 1 basis point to 0.710 percent JP5YTN=JBTC.

The benchmark 10-year yield JP10YTN=JBTC climbed 2.5 basis points to 1.470 percent after hitting 1.475 percent, its highest since mid-June.

The 20-year yield JP20YTN=JBTC rose 1.5 basis points to 2.160 percent, a three-month high, and the 30-year yield JP30YTN=JBTC gained 2 basis points to 2.280 percent.

The Nikkei .N225 ended up 0.2 percent after losing as much as 0.6 percent. [.T] (Editing by Chris Gallagher)