JGB futures hit 2-mth high, curve widest in decade

* March futures hit 2-mth high

* Longer-dated bonds rally after strong 30-yr auction

* Expectations of BOJ easing support shorter-dated notes

* 5-yr/20-yr spread widens to 10-yr high at one point

By Rika Otsuka

TOKYO, March 9 (Reuters) - Japanese government bond futures rose to their highest in more than two months on Tuesday, as a 30-year debt sale earlier in the day drew strong investor demand and sparked buying in longer-dated notes.

Before the auction results were announced, jitters over the offering had lifted longer-dated yields, with the five-year/20-year yield spread reaching its widest point in a decade.

Shorter-dated debt continued to draw support from speculation that the Bank of Japan could further relax its monetary policy as soon as its March 16-17 meeting.

The Ministry of Finance's 600 billion yen ($6.6 billion) 30-year JGB auction attracted bids 3.85 times the offer, above the average of 3.48 from the past 12 sales in the same maturity. TENDER015

Solid auction results helped encourage investors to buy superlong bonds traders said.

Debt with maturities longer than 10 years had underperformed the rest of the market as foreign investors, who used to be big players in the longer-dated sector, have been trimming their JGB holdings since the global credit crunch.

"A smooth auction has prompted investors to pick up longer-dated bonds, although it's still unclear how long this buying will last," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

March 10-year JGB futures rose 0.14 point to 140.26 2JGBv1 after rising as high as 140.30, their highest since Dec. 22.

The benchmark 10-year yield fell 1.5 basis points to 1.300 percent JP10YTN=JBTC, edging towards a 2-month low of 1.290 percent first marked in late February.

The five-year yield inched down 1 basis point to 0.460 percent JP5YTN=JBTC, matching a two-month trough first hit on March 5, when the Nikkei newspaper reported that the BOJ was mulling a further easing of its monetary policy. [ID:nTOE6230A7]

The two- and five-year yields are more sensitive to the outlook for monetary policy.

The 20-year yield slipped 1.5 basis points to 2.120 percent JP20YTN=JBTC, while the yield on the No. 31 30-year JGB fell 2.5 basis points to 2.300 percent JP30YTN=JBTC.

CURVE SEEN STAYING STEEP

The 20-year yield rose as high as 2.140 percent before the auction results were announced, with the 5-year/20-year yield spread exceeding 137 basis points to hit its widest since November 1999, according to Reuters data. The spread now stands at 166 basis points.

Analysts said longer-dated bonds could extend gains a little more as investors now need to add JGBs to their portfolios with a new financial year starting on April 1.

Strong results at the 30-year sale may not ease the steepening pressure on the yield curve as the market has to face more superlong auctions next month, said Takafumi Yamawaki, a senior rates strategist at BNP Paribas Securities.

Japan's worsening fiscal health is another reason preventing longer-dated JGB yields from falling steeply. The nation's public debt now stands around 200 percent of gross domestic product, the highest among developed economies.

"Twenty-year bonds are particularly weak as they are no longer Japanese life insurers' favourite," said Mitsubishi's Inadome. "The five-year/20-year yield spread is likely to further steepen."

Life insurers have recently started to buy 30- and 40-year bonds that better match their asset-liability management needs. (Additional reporting by Shinichi Saoshiro; Editing by Joseph Radford)