JGBs fall on Treasuries, Nikkei; curve steepens

* JGB futures dip, bearish Treasuries weigh

* Nikkei hits 3-mth high, puts more pressure on bonds

* JGB mkt issuance to hit record high in FY10/11 -sources

* 5-yr/20-yr spread edges back towards decade high

By Shinichi Saoshiro

TOKYO, TOKYO, Dec 24 - Japanese government bonds fell on Thursday, with market sentiment dampened after the U.S. benchmark Treasury note yield hit a four-month high earlier in the week and as Tokyo's Nikkei average .N225 climbed to a three-month high.

The JGB yield curve steepened, with the five-year/20-year yield spread approaching a decade high hit last week.

Japan is likely to issue around 145 trillion yen ($1,583 billion) in JGBs to the market in fiscal 2010/11, which starts next April 1, government sources said on Wednesday, in line with market expectations. [ID:nTOE5BM04T]

March 10-year JGB futures fell 0.13 point to 139.89 after hitting 139.75.

"It is basically bonds reacting negatively to firmer stocks, although market action as a whole is subdued ahead of the year-end," said Akito Fukunaga, a rates strategist at Credit Suisse.

"That the government seems on track to keep new JGB issuance next fiscal year capped at 44 trillion yen has also lessened the element of surprise, limiting market moves."

At roughly 17,800 lots, Thursday's daily trading volume for March JGB futures was significantly below last week's daily average of around 24,500 lots.

The Nikkei business daily reported that the Democratic Party-led government is likely to spend less than half the money it wanted to set aside next fiscal year as Japan's large debt burden limits fiscal policy -- a step some say may help the government to achieve its self-imposed cap on new government bond issuance at around 44 trillion yen. [ID:nSGE5BM0LN]

JGB MARKET ISSUANCE TO HIT RECORD HIGH

The sum of 145 trillion yen in market issuance would still be a record high, exceeding the 137.5 trillion yen in issuance due this fiscal year, and poses another test for a market that has been forced to digest ever rising supply.

"The amount is in line with expectations and is unlikely to have a strong impact on the market," said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities.

Market players polled by Reuters earlier in December said they were expecting JGB market issuance to hit 145.3 trillion yen in fiscal 2010/11. [ID:nT147988]

"As with previous years the market has had about a month to factor in what next fiscal year's issuance would likely turn out to be," Ishii at Mitsubishi UFJ Securities said.

But analysts said recent rises in longer-dated U.S. Treasury debt yields and the accompanying steepening of the yield curve was clouding JGB market sentiment.

The 10-year Treasury note yield US10YT=RR rose to its highest since mid-August on Tuesday amid economic optimism before pulling back slightly a day after. [US/]

Japanese markets were closed on Wednesday for a national holiday.

The two-year yield edged up 0.5 basis point to 0.165 percent JP2YTN=JBTC.

The five-year yield was unchanged at 0.455 percent after reaching a four-year low of 0.425 percent on Monday.

The 10-year JGB yield rose 1 basis point to 1.260 percent JP10YTN=JBTC. The yield has moved in a narrow range of 1.225 to 1.270 percent this week after hitting an 11-month low of 1.190 percent at the beginning of the month.

The 20-year yield climbed 2 basis points to 2.095 percent JP20YTN=JBTC.

The five- to 20-year yield spread inched up a basis point on the day to 164 basis points on Thursday, crawling towards a decade high of 165 basis points struck last week.

The JGB yield curve has been under steepening pressure recently as the Bank of Japan's commitment to low rates has helped pin down shorter-dated yields while those of longer-dated maturities have drifted higher, benefiting less from the central bank's easy stance.

The Nikkei rose 1.5 percent, lifted by gains on Wall Street and a weaker yen. [.T] (Editing by Joseph Radford)