JGB futures fall from 2-year peak as stocks jump

* Nikkei's 2 pct rise sparks profit-taking in govt debt

* JGB futures find near-term support at 140.18

* Dealers dump leftover 5-year notes a day after auction

* Life insurer demand limits losses in superlongs

By Rika Otsuka

TOKYO, June 11 (Reuters) - Japanese government bonds fell on Friday, with JGB futures sliding from a two-year peak hit earlier in the week, as a jump in stocks prompted investors to book profits on a sharp bond rally over the last two months.

The five-year yield climbed from a seven-year low as dealers dumped leftover five-year notes that they bought at Thursday's five-year auction, traders said.

Long-term investors, such as life insurers, hunted for bargains in 20- and 30-year notes, helping limit losses in superlong bonds. The yield curve flattened slightly, as a result.

Caution about high bond prices had been building, and investors took their cue from higher stocks and Thursday's fall in U.S. Treasuries to sell JGBs. [ID:nN10243329]

But analysts said Friday's slide in government debt is not a sign that bond investors are turning bearish. In fact, few investors are willing to cut back their holdings of safe-haven JGBs as worries about the euro zone fiscal problems persist.

"What the market is seeing is just a correction after it has risen so much so fast," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

The new lead September futures contract was down 0.27 point at 140.34 2JGBv1, after sliding as low as 140.20.

Futures have support at 140.18, a low hit twice in the past three weeks, and a break below that level could trigger stops.

The prior June futures rose to a two-year high of 141.19 earlier this week as investors sought safety in JGBs partly due to concerns about the European debt crisis.

The benchmark 10-year yield rose 3 basis points to 1.230 percent JP10YTN=JBTC. It briefly slipped to 1.190 percent on Thursday, matching this year's trough. A fall below that level would take the benchmark yield to its lowest since January 2009.

Yields on the new No. 89 five-year notes rose 2.5 basis points to 0.420 percent JP5YTN=JBTC. On Monday, five-year yields dropped as low as 0.365 percent, the lowest since August 2003, as banks poured funds into the midterm sector. Bank lending has been falling with companies reluctant to increase capital spending, leaving banks with surplus cash to invest.

Tokyo's Nikkei stock average .N225 ended up 1.7 percent, helped by a halt in the yen's advance against the euro and after signs of health in the euro debt market. [.T] [FRX/]

The Nikkei business daily said on Friday that Japan will pledge to cap budget spending for three years in a fiscal strategy due this month as the new government struggles to convince markets of its resolve to fix the country's tattered finances. [ID:nTOE65909A]

The bond market showed muted reaction to the report as it is unclear whether the government could really implement its new budget reform plan due to political uncertainty, analysts said.

Japan's public debt has ballooned to around twice the size of its economy as the government ramped up spending to stimulate growth.

Japan's sovereign five-year credit default spread JPGV5YUSAC=GF has widened to hover just below 100 basis points this week. It was was indicated at 92-92 basis points on Friday, slightly down from 97-98 basis points on Thursday.

"The main factor that has caused a widening in Japan's sovereign CDS spread is coming from elsewhere, not from Japan," said a CDS trader at a brokerage in Tokyo, adding that overseas players were buying protection for government debt on jitters about Europe's debt problems.

"At the same time, it is also true that the spread of Japan's sovereign CDS looks tight compared to those of other countries, given Japan's high ratio of public debt to GDP."

The 20-year yield was up 1.5 basis points at 1.970 percent JP20YTN=JBTC, after rising to 1.990 percent. Traders said some buying emerged as the yield neared the psychologically key 2.0 percent level.

The 30-year yield rose 1 basis point to 2.045 percent JP30YTN=JBTC. (Editing by Chris Gallagher)