JGB 10-year yield hits 2-mth low on credit jitters

* Benchmark yield hits 2-month low as credit jitters persist

* Profit-taking limited after three-day rally

* Longer-dated bonds supported by life insurers' buying

By Satomi Noguchi

TOKYO, July 11 (Reuters) - Japanese government bonds rose on Friday, pushing the benchmark yield down to a two-month low as investors shifted funds to the safe-haven debt on persistent worries about the financial sector and economy.

JGB futures erased an earlier drop when some investors booked profits after a three-day spike up that had powered futures to highs not seen since mid-May.

A surge in oil prices CLc1 on Thursday towards a record high kept inflation concerns intact, providing an excuse to sell bonds, analysts said.

But such selling was limited as Tokyo shares dropped and many investors favoured JGBs after concerns deepened about big U.S. mortgage providers' ability to raise capital needed to purchase home loans, causing their shares and bonds to tumble on Thursday.

"The market is swayed by overseas factors and making investors hesitant to sell JGBs even when we are missing strong domestic factors to rationalise a further fall in the yields," said Keiko Onogi, a senior JGB strategist at Daiwa Securities SMBC.

September futures 2JGBv1 rose 0.15 point to 136.25, staying near 136.40 hit the previous day, the highest since May 13. Futures fell as far as 135.97.

The benchmark 10-year yield JP10YTN=JBTC was down a basis point at 1.565. It fell as far as 1.560 percent, a two-month trough.

Longer-dated bonds have been supported by constant buying by life insurers, helping the 10-year yield come down sharply from 1.895 percent hit in mid-June, its highest since July 2007.

Nippon Life, Japan's biggest life insurer, told Reuters on Thursday it increased its JGB holdings by 100-200 billion yen ($933.7 million-$1.87 billion) in the April-June first quarter of the current business year.

"There were good buying opportunities both for 10- and 20-year bonds when taking a one-year horizon, so we made the investment earlier than we had planned," said Nippon Life. [ID:nTFD002972]

The insurer said it might increase domestic bond holdings further if 20-year yields rise toward 2.5 percent, adding that another key level would be 2.0 percent for 10-year yields.

The 20-year yield JP20YTN=JBTC was flat at 2.145 percent.