JGBs up on Nikkei; strong 20-yr sale halts steepening

* Bond futures lifted as Nikkei slumps

* 20-yr sale draws strongest demand in 2 years

* Yield curve flattens a touch after robust 20-yr tender

By Shinichi Saoshiro

TOKYO, April 22 (Reuters) - Japanese government bonds gained on Thursday, lifted by a plunge in Tokyo stocks, while a recent steepening of the yield curve halted as longer-dated cash yields declined in response to a 20-year debt sale that attracted the strongest demand in two years.

The 1.1 trillion yen ($11.8 billion) 20-year debt sale was seen as a test of demand at low yields after the yield on the maturity fell to a four-month low earlier this week.

The sale's bid-to-cover ratio, a gauge of demand at auctions, climbed to 4.02 from 3.49 at the previous sale in March, its highest since the May 2008 offering. [ID:nMOFDV5002]

"The auction results were stronger than expected. The Ministry of Finance offering a new 20-year issue instead of re-opening an issue already in circulation helped the sale," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

Known as re-openings, the ministry often sells extra amounts of JGBs it has previously sold. While re-openings can improve the liquidity of an issue, it can sometimes dent demand from investors looking to diversify their bond portfolios.

"The outcome reflects demand from dealers who wanted to stock up their inventories with newly issued 20-years. But digestion in the secondary market may take some time as investors may not be in a hurry to buy at these low yield levels," Inadome said.

Japan's top nine insurers, one of the main buyers of superlong debt, hold a total of around $1.6 trillion in assets -- about the size of Brazil's economy.

Some of these insurers have said they want increase their superlong holdings if yields rise. [JP/INS]

The No.116 20-year yield dropped 2 basis points to 2.085 percent JP20YTN=JBTC, matching a four-month low struck on Monday.

The benchmark 10-year yield fell 1.5 basis points to 1.315 percent JP10YTN=JBTC.

The five-year yield declined 1.5 basis points to 0.480 percent JP5YTN=JBTC.

The 10-year/20-year yield spread tightened 0.5 basis point to 77 basis points, pulling away from a three-week high of 77.5 basis points hit the previous day.

June 10-year futures 2JGBv1 gained 0.21 point to 139.34, coming within striking distance of a one-month high of 139.36 marked earlier in the week.

The futures were lifted after worries over Greece's debt crisis buoyed U.S. Treasuries and as Tokyo's Nikkei average fell 1.3 percent following a lacklustre showing on Wall Street. [.T]

The futures market has drawn the bulk of its incentives this week from stocks, which have fluctuated widely on factors including shifts in investor appetite towards riskier assets, currency movements and corporate results.

Market players said the futures were lifted by purchases by commodity trading advisers who also sold stock futures.

The Bank of Japan is expected to forecast consumer price growth of up to around 0.2 percent for the year to March 2012 in its outlook report due at the end of this month, the Yomiuri newspaper reported on Thursday. [ID:nTOE63L02B]

"The market has had time to factor in such news. Even if the BOJ actually raises its CPI forecast, the impact on the market should be limited as it will not lead to thoughts of an immediate rate hike as deflation persists," said Atsushi Ito, a rates strategist at Morgan Stanley. (Editing by Michael Watson)