JGB curve steepest in 7 yrs on supply woes and BOJ

* 5-yr/20-yr yield spread 157.5 bps, widest since 2002

* Weak 30-yr auction weighs on 30- and 20-yr bonds

* Market cautious as it braces for 30-yr issuance rise

* Short- to medium-term JGBs supported by BOJ easing stance

* Govt's Y7.2 trln stimulus in line with mkt expectations

By Masayuki Kitano

TOKYO, Dec 8 (Reuters) - Japan's five- to 20-year yield curve hit its steepest level in seven years on Tuesday, with superlong bonds taking a hit after a 30-year auction was met with weak demand as investors braced for more issuance in that sector.

JGBs took in stride news that the government had agreed on a 7.2 trillion yen ($80.59 billion) stimulus package, and that new JGB issuance for this fiscal year would rise by roughly 9 trillion yen, mainly to offset a tax revenue shortfall. [ID:nTKX006584] [ID:TOE5B701F]

But a poorly received auction of 600 billion yen in 30-year JGBs weighed on super-long bonds, causing the 5- to 30-year yield spread to hit a 21-month high, and pushing the 5- to 20-year spread up to a seven-year high earlier.

"It was pretty weak," said Takafumi Yamawaki, an interest rate strategist at BNP Paribas Securities, adding that the lowest price of 99.50 at the 30-year auction was well below the market's expectations for about 99.80.

The Ministry of Finance is now scheduled to hold another 30-year JGB auction in February.

But market players are bracing for the possibility that the Ministry of Finance may sell more 30-year debt in March to help offset this fiscal year's tax revenue shortfall, and for 30-year debt issuance to rise next fiscal year compared to this year. [ID:nTOE5B5021] [ID:nT206510]

"Some investors may have figured that if there is going to be issuance of 30-year bonds in March, they may as well wait until then when taking into account where the yields are now," said Yamawaki at BNP Paribas Securities.

A portfolio manager for a Japanese insurer said the weakness of Tuesday's 30-year bond auction may have been exacerbated by the fact that foreign dealers seem cautious about holding large amounts of bonds in their inventories ahead of year-end book closings.

Lead December 10-year JGB futures rose 0.18 point to 140.09 2JGBv1.

The benchmark 10-year yield dipped 1 basis point to 1.270 percent JP10YTN=JBTC.

Finance Minister Hirohisa Fujii said new government bond issuance for the current fiscal year to next March would rise to more than 53 trillion yen, up from previous plans to issue 44.1 trillion yen in new debt this fiscal year.

The size of the increase was not a surprise, said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

"I think excessive concerns have probably receded," he said.

Of the roughly 9 trillion yen in new debt to be issued as a result of the extra budget, market players expect roughly 5 trillion yen to be offered to the market via regular auctions, Inadome said.

Market players expect short-term treasury bills to bear the brunt of the issuance increase for this fiscal year, in addition to the possibility of an extra 30-year auction in March.

CURVE STEEPENS

The 10-year yield had climbed to a five-month high of 1.485 percent in early November, when JGBs were sold off on concerns about rising debt issuance and the longer-term outlook for Japan's fiscal policy.

Such concerns about Japan's increasing debt are unlikely to disappear, given that market players expect JGB issuance to the market to hit a record 145.3 trillion yen in fiscal 2010/11, according to a recent Reuters poll. [ID:nT147988]

But JGBs have rallied since early November as the focus shifted towards the yen's recent rise to a 14-year high against the dollar and worries that the currency's strength could add to deflationary pressure on the economy.

The rally peaked last Tuesday, when the BOJ called an emergency policy board meeting and decided to introduce a new money market operation to help bring down longer-term money market rates.

That BOJ decision reinforced market expectations for the BOJ to keep interest rates near zero percent for an extended period, and helped fuel a steepening in the yield curve by lending support to short- and medium-term notes.

In contrast, the superlong sector has underperformed as dealers and investors prepared for Tuesday's 30-year bond auction and next week's offer of 20-year JGBs, with prospects for increases to 30-year debt issuance an additional factor.

The 30-year JGB yield rose 1.5 basis point to 2.210 percent JP30YTN=JBTC, and the five- to 30-year yield spread rose to 172.5 basis points, the widest since March 2008.

The five- to 20-year yield spread touched 157.5 basis points earlier, the widest in about seven years. It later pulled back a bit to 156.5 basis points. ($1=89.34 Yen) (Editing by Michael Watson)