JGB futures hit 1-month high, funds cover shorts

* JGB futures hit 1-mth high, foreign funds cover shorts

* JGBs retain momentum from Thursday's robust 5-yr sale

* Cash bonds also bought, 2-yr/10-yr spread tightens further

By Shinichi Saoshiro

TOKYO, Nov 13 (Reuters) - Japanese government bond futures rose to a one-month high on Friday, riding on upward momentum from the previous day's robust five-year auction results, with speculators covering short positions as recent bearish sentiment receded further.

JGB futures have surged well more than a full point over the past three days, and got a big lift on Thursday after the well-received five-year debt sale helped allay some concerns over Japan's fiscal situation.

Market players said foreign hedge funds and commodity trading advisers continued to cover short positions in JGB futures on Friday, adding that some of the funds were selling stock futures as well.

"Short covering in futures could run a little longer as there appears to be more positions that could be covered. The trend is pointing towards lower bond yields as the Nikkei has stalled and Treasuries have gained," said Hidenori Suezawa, chief strategist at Nikko Cordial Securities.

Speculators had placed bets in the futures and derivatives markets that fiscal concerns would throw the JGB market into turbulence as Japan, already the most indebted industrialised nation, was seemingly poised to further increase debt issuance.

Fiscal worries have gripped the market over the past month, sending the benchmark 10-year yield to a five-month high this week.

A turning point came after officials said this week that the government must ensure its spending plans did not rattle bond investors' confidence and try to keep next fiscal year's new JGB issuance below 44 trillion yen.

The comments prompted a market rebound that gathered steam after Thursday's five-year sale drew ample investor demand, further cooling fiscal concerns following a string of poorly received auctions.

Still, details about the government's possible extra issuance for the current fiscal year and next year were yet to be seen and analysts said this was likely to keep the market on its toes.

Bond investors are bracing for Japan to issue more JGBs for the current fiscal year through March 2010 to offset an expected tax revenue shortfall. They are also keeping a close eye on next fiscal year's government spending plans and how much bond issuance that may entail.

CASH BONDS GAIN, 2-YR/10-YR SPREAD TIGHTER

December 10-year futures 2JGBv1 gained 0.41 point to 138.90 after hitting a one-month high of 139.02. The contract had hit a three-month low of 137.29 on Monday.

The two-year yield JP2YTN=JBTC dipped 0.5 basis point to 0.250 percent. The five-year yield JP5YTN=JBTC fell 2.5 basis points to 0.625 percent.

The benchmark 10-year yield dropped 3 basis points to 1.340 percent JP10YTN=JBTC, pulling sharply away from a five-month high of 1.485 percent hit early in the week.

The 20-year yield declined 3 basis points to 2.090 percent.

The two-year/10-year yield spread tightened by 2.5 basis points to 109 basis points, moving away from a 3-½ year high of 121 basis points brushed earlier in the week.

Ten-year JGBs gained as banks' demand for midterm bonds spilled over into the long end in addition to receiving in interest rate swaps of the same maturity, market players said.

The bid rate on 10-year swaps JPYSB6L10Y= declined roughly 3 basis points to around 1.459 percent on Friday. Super-long swap rates also fell as investors continued to unwind steepening positions built earlier on anticipation of the yield curve steepening on fiscal concerns. (Reporting by Shinichi Saoshiro; Editing by Chris Gallagher)