* Yield curve steepens as superlong tenor lags
* 10-yr futures erase losses as stocks rally, touch 9-yr high
* 20-yr sale meets solid demand, with bid-to-cover of 3.67 times
By Lisa Twaronite
TOKYO, Nov 15 (Reuters) - Benchmark Japanese government bond prices erased losses and longer maturities skidded on Thursday after Shinzo Abe, touted as Japan's next leader, called for the country's central bank to adopt interest rates of zero or below zero.
Cash JGBs were already paring their morning losses after a 20-year sale attracted solid demand, when Abe told reporters he wanted to see further aggressive easing to enhance lending.
His remarks sent stocks up and the yen down, and helped push JGB futures to a 9-year high. The JGB yield curve steepened as 5- and 10-year notes rose while the superlong sector sold off.
"Abe said he wanted zero or minus interest rates. That triggered a big rally in the stock market, and also a weaker yen, and the short- to mid-range of the JGB market is very strong. So everyone is happy right now -- except for those who bought the 20-year paper today," said Tadashi Matsukawa, head of Japan fixed income at Pinebridge Investments in Tokyo.
"If you lower interest rates to zero, you get a steep yield curve, so this could probably continue."
Japanese Prime Minister Yoshihiko Noda is set to dissolve parliament's lower house on Friday for a snap election on Dec. 16, in which his party is likely to fare poorly.
Abe, leader of the main opposition Liberal Democratic Party, is likely to take the helm and bring more expansive fiscal policies while increasing pressure on the Bank of Japan for more aggressive stimulus.
The BOJ is set to hold steady at a policy meeting next week. It might also defy market expectations of action next month and hold off on any further monetary stimulus until early next year to size up the policies of a new government, sources say.
The 10-year JGB futures contract closed up 0.12 point at 144.59 after rising as high as 144.66 after Abe spoke. Futures ended morning trade down 0.12 point at 144.35. Volume was an active 50,507 contracts, its heaviest since Oct. 18 and nearly four times Thursday's volume of 13,581 contracts.
In cash trading, 10-year yields slipped half a basis point to 0.730 percent, within 1 basis point of a nine-year low of 7.20 percent hit in July. Earlier, 10-year yields climbed as far as 0.760 percent, their highest in a week.
The yields on 30-year bonds, the most sensitive to political concerns, added 3 basis points to 1.935 percent, while yields on 20-year debt gained 2.5 basis points to 1.680 percent.
The spread between 10-year and 30-year yields rose to 1.205 percentage points, its widest since March 2008.
Abe's comments completely overtook any impact from a strong 20-year auction. The Ministry of Finance offered 1.2 trillion yen of 20-year notes, reopening the number 140 issue for the second time with a coupon of 1.7 percent.
The sale's lowest accepted price was 100.25, and it drew robust bids of 3.67 times the amount offered, only slightly down from the previous sale's bid-to-cover ratio of 3.81. The tail widened slightly to 0.03 from 0.01 at the last sale.
"The results came out better than expected, but still, concerns remain for the superlong tenor, and dissolution obviously puts steepening pressure on the curve," said Maki Shimizu, senior strategist at Citigroup Global Markets Japan.
"If rates were lowered, meaning if the paid interest on excess reserves was lowered, then that will definitely support not just medium-term but the long-term sector, so that would make the curve keep steepening," she said.