JGBs retreat on Treasuries, continuing supply woes

* JGBs hurt after monetary policy woes hit U.S. Treasuries

* Lingering supply concerns also continue to weigh on JGBs

* Midterm JGBs bear brunt of selling

By Shinichi Saoshiro

TOKYO, Oct 26 (Reuters) - Japanese government bonds fell on Monday, with the 10-year yield touching a fresh 2-½ month high, as supply worries continued to weigh on the market and after U.S. Treasuries retreated on aggravated concerns that the Federal Reserve may depart from its low interest rate policy earlier than anticipated.

A 0.8 percent bounce by Tokyo's Nikkei stock average .N225 to a four-week closing high also added to pressure on JGB prices. [.T]

December 10-year JGB futures 2JGBv1 lost 0.32 point to 137.99 after hitting 137.93, their lowest since Aug. 14.

"Weaker Treasuries provided much of the incentive for JGBs to turn lower. Supply concerns are nothing new but they are hovering in the background," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

Midterm JGBs, which had been relatively immune to the sell off that hit longer maturity debt this month, bore the brunt of selling on Monday.

Midterm JGBs were hit by the slip in bond futures, dealers said, adding that some speculators were beginning to build short positions in futures after liquidating their long positions.

The five-year yield climbed 3 basis points to 0.685 percent JP5YTN=JBTC after hitting a four-year low of 0.555 percent at the beginning of the month.

Market players said big domestic banks, who were large net buyers of midterm JGBs last month, were sellers of the paper, while their smaller counterparts emerged to buy on price dips.

"Five-year JGBs are exposed to selling as they still appear expensive on the yield curve compared to other maturities. They are also being hit by the fall in futures," said Shinji Ebihara, a quantitative analyst at Mizuho Securities.

The five-year/20-year yield spread widened by 0.5 basis point to 146 basis points on Monday but was still below a four-year high of around 150 basis points hit last week according to Reuters data.

The benchmark 10-year yield rose 3 basis points to 1.390 percent JP10YTN=JBTC, after hitting 1.395 percent, its highest since mid-August.

The 20-year yield JP20YTN=JBTC gained 3.5 basis points to 2.145 percent.