JGBs edge up as Tokyo stocks slip from 4-wk high

TOKYO, Oct 27 (Reuters) - Japanese government bonds edged up on Tuesday, with futures bouncing back from a 2-½ month low, as Tokyo stocks dropped from four-week highs after losses on Wall Street.

* But lingering concerns over added debt issuance capped the bond market. Immediate focus was on a regular meeting between the Ministry of Finance and JGB investors scheduled for later on Tuesday.

* The ministry is expected to discuss reallocating around 2.6 trillion yen ($28.1 billion) of debt intended to be sold as retail JGBs, floating-rate and inflation-linked debt this fiscal year through March 2010 to the market in the form of fixed-rate paper.

* "The likely issuance increase as a result of the reallocation has already been factored in by the market. Market reaction has been relatively calm and this shows that it is prepared to absorb the increase without too much difficulty," said Koji Ochiai, a senior market economist at Mizuho Investors Securities.

* Tuesday's meeting between the MOF and investors follows a regular gathering on Friday with JGB primary dealers at which they discussed the same issues.

* Demand for JGBs tailored for retail investors has dropped due to their modest returns, while appetite for floaters and linkers has not recovered from a sell-off that followed last year's financial market turmoil.

* The 2.6 trillion yen is expected to be reallocated mainly to one-year bills, as well to two-, five- and 10-year JGBs --all maturities sold to the market on a monthly basis. Analysts think the increase could be implemented as early as November, which would enable the additional issuance to be distributed along five sales of each maturity through March 2010.

* Past the reallocation, the market is bracing for an issuance increase that may be needed to cover an expected tax revenue shortfall. Japan has already increased planned new JGB issuance to 44.1 trillion yen from 33.2 trillion yen but bond investors are eyeing that to rise to about 50 trillion yen.

* The market showed little reaction to finance minister Hirohisa Fujii who reiterated on Tuesday that new bond issuance in fiscal 2010/2011 must be kept below 44 trillion yen. [ID:nTKF106696]

* December 10-year JGB futures gained 0.02 point to 138.01 after hitting 137.91, their lowest since Aug. 14 2JGBv1.

* JGB gains were also limited following a retreat by U.S. Treasuries. Treasury prices fell sharply on Monday, with the benchmark 10-year note yield US10YT=RR climbing to a two-month high, as investors braced for another record round of new debt sales and fretted over the possible timing of a Federal Reserve departure from its easy monetary policy. [US/]

* The five-year yield JP5YTN=JBTC dipped 0.5 basis point to 0.685 percent after rising to a 2-½ month high of 0.695 percent on Monday. The benchmark 10-year yield also fell 0.5 basis point, to 1.390 percent JP10YTN=JBTC after brushing a 2-½ month high of 1.395 percent.

* The 20-year yield JP20YTN=JBTC declined 0.5 basis point to 2.140 percent.

* Tokyo's Nikkei average .N225 retreated 1.5 percent from the previous day's four-week closing high, dented as exporters fell on Wall Street's losses [.T]. (Reporting by Shinichi Saoshiro; Editing by Joseph Radford)