JGB futures drop on Treasuries, auction eyed

* JGBs drop on slide in Treasuries the previous day

* Dealers sell to hedge against 10-year auction

By Rika Otsuka

TOKYO, Jan 6 (Reuters) - Japanese government bond futures dropped on Tuesday, the first full trading day of this year, as investors took their cue from an overnight drop in U.S. Treasuries.

Investors booked profits on longer-dated bonds after a steep rally late last year pushed the benchmark 10-year yield to a five-year low. Dealers sold futures to hedge against the finance ministry's 10-year debt auction on Thursday, the first test of demand for 2009.

"JGBs are under pressure as the U.S. Treasury market has entered into a period of adjustment," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities.

"Investors are also selling JGBs to make room in their portfolios before a ten-year auction."

March futures slid 0.80 point to 139.03 2JGBv1. The lead futures contract hit a 3-½ month high of 140.15 on Dec. 30, the last trading day of 2008.

The benchmark 10-year yield rose 5 basis points to 1.250 percent JP10YTN=JBTC, climbing further from a five-year trough of 1.155 percent hit on Dec. 30.

The benchmark yield posted its biggest plunge in six years in 2008, falling more than 30 basis points as the sharp global economic slowdown prompted the Bank of Japan to lower interest rates to the current 0.10 percent level.

The five-year yield was up 3 basis points to 0.700 percent JP5YTN=JBTC, while the 20-year yield jumped 7 basis points to 1.830 percent JP20YTN=JBTC.

The yield curve steepened slightly as a result.

Longer-dated U.S. Treasuries retreated on Monday as investors wondered how well the market might absorb the swath of fresh supply needed to meet the government's rising need to borrow in a time of crisis. [US/] (Editing by Edwina Gibbs)