JGB 10-yr yield hits 4-mth low on economy concerns

* 10-year yield touches 4-month low of 1.455 percent

* Economy concerns overshadow Nikkei rally, weaker Treasuries

* Short end sags after MOF announces 2-year JGB issue increase

By Shinichi Saoshiro

TOKYO, Aug 11 (Reuters) - Japanese government bonds advanced on Monday, with the benchmark 10-year yield hitting a fresh four-month low as persistent concerns about the domestic and overseas economies overshadowed solid gains in Tokyo shares.

Cash yields from two to 30 years dropped to four-month lows on Friday on concern over the strength of the economy, and on Monday that trend continued.

"The worsening economic prospects, especially for the domestic economy, are persistently strong," said Atsushi Ito, a fixed-income strategist at Morgan Stanley.

"That is obvious from the absence of profit-taking when the 10-year yield declined below 1.5 percent. Some investors are likely taking advantage of the holiday-thinned market to shop while they can," said Ito.

The week marks Japan's "obon" holidays, when many people return to their hometowns on vacation.

The 10-year yield edged down half a basis point to 1.465 percent JP10YTN=JBTC after touching a new four-month low of 1.455 percent.

September 10-year futures 2JGBv1 slipped 0.03 point to 137.65. Futures momentarily edged up to 137.87 as the 10-year bonds gained, but market participants said offers placed on the back of the Nikkei's surge dragged them back into the red.

A 1.7 percent jump in the Nikkei share average .N225 and Friday's retreat in Treasuries put some pressure on bonds, but not enough to traders from pushing yields down further.

April-June gross domestic product data on Wednesday will give the markets a chance to gauge the strength of the economy. It is forecast to have shrunk 0.6 percent in those three months, ending three straight quarters of expansion, according to a Reuters poll of economists. [ID:nT208199]

15-YEAR FLOATER JGB ISSUANCE HALVED

In contrast to longer-dated maturities, the short to midterm JGB sectors sagged after the Ministry of Finance announced at the end of last week that it would halve issuance of unpopular 15-year floating rate bonds and increase that of two-year JGBs and one-year treasury bills instead. [ID:nT9661]

The MOF will cut issuance of "floaters" to a total of 1.2 trillion yen ($10.9 billion) this fiscal year, down from an initially planned 2.4 trillion yen.

In an interview with Reuters, the ministry suggested it was open to more cuts in floater issuance. [ID:nT16079]

The ministry will also increase the monthly offer amount of two-year JGBs to 1.8 trillion yen in the October-March period from 1.7 trillion yen each month in the first half.

The decision to concentrate issuance increases at the short end of the yield curve was a surprise to analysts, many of whom had expected an increase in JGBs in the super long-end, where demand from investors such as life insurers has been persistently strong.

"The MOF probably concluded that increased issuance in the shorter-dated maturities would be absorbed smoothly, especially with prospects of a Bank of Japan rate hike diminishing," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Securities.

The two-year yield rose 1.0 basis point to 0.705 percent JP2YTN=JBTC, while the five-year yield climbed 1.5 basis points to 1.025 percent JP5YTN=JBTC. (Editing by Hugh Lawson)