(Corrects price move of 10-year yield to a drop of 1.5 basis points)
* Curve flattens as strong 40-year sale lifts superlong tenor
* 10-yr futures close at session high, 3-month peak
By Lisa Twaronite
TOKYO, Nov 8 (Reuters) - Japanese government bonds rallied across the curve on Thursday, sending benchmark yields to a 7-month low, as investors sought safe havens on fears about the looming U.S. fiscal crisis and as strong demand at a 40-year sale bolstered the recently languishing long end.
President Obama is facing a political showdown over the so-called "fiscal cliff" of about $600 billion in expiring tax cuts and spending reductions due to take effect in January. Some analysts warn the drop could hit the U.S. economy harder than expected.
These concerns helped support demand at the Ministry of Finance's offering of 400 billion yen worth of 40-year debt with a coupon of 2.0 percent, reopening the number 5 issue. It produced a highest accepted yield of 2.115 percent, with 97.8666 percent of the bids accepted at that yield.
The sale drew bids of 3.82 times the amount offered, up from the previous sale's bid-to-cover ratio of 3.48.
"The 40-year auction was extremely strong today. The bid-to-cover was higher than normal, and also we saw solid bids from the life insurance companies," Tadashi Matsukawa, head of Japan fixed income at Pinebridge Investments in Tokyo.
Obama's win over challenger Mitt Romney also removed some investors' fears that the U.S. Federal Reserve would end its commitment to easy policy before mid-2015, he said.
"That is one reason people feel more comfortable" with bonds, he said.
Grim Japanese economic data also underpinned demand for fixed-income assets. Japan's core machinery orders plunged more than expected in September and its current account surplus also fell more than forecast, following a sharp drop in exports.
The 10-year yield slipped 1.5 basis points to 0.745 percent, its lowest level since April 7.
Ten-year JGB futures ended up 0.17 point at their session high of 144.50, their highest level since Aug. 3.
The yield curve flattened as the superlong sector reversed the previous session's losses, with yields on 30-year bonds losing 3 basis points to 1.920 percent, their lowest since Oct. 22, while yields on 20-year debt also fell 3 basis points to 1.660 percent, their lowest since Sept. 24.
"The mood has turned to risk-off as investors ponder the fiscal cliff. Even though the 10-year sector is expensive, it's the most liquid and there are still buyers," said a fixed-income fund manager at an asset management firm in Tokyo.
"Should we buy, too? We are baulking, but what else can we do?" he added. (Reporting by Lisa Twaronite)