* Ten-year JGB futures hit seven-week high
* Superlongs underperform on supply concern
By Dominic Lau
TOKYO, Oct 1 Benchmark 10-year Japanese government bonds drifted higher on Monday, with the yield hitting a seven-week low, as weak economic data boosted the appeal of fixed income at the expense of riskier assets.
But superlong Japanese government bonds underperformed on supply concerns ahead of a liquidity-enhancing auction the next day, as well as ahead of a regular auction of 30-year bonds next week and one for 20-year debt the week after.
Manufacturing activity in China, Japan's biggest exports market, remained in contraction in September, according to the official purchasing managers' index.
Adding to the concern, business sentiment for big Japanese manufacturers worsened in the three months to September and will stay gloomy, the Bank of Japan's tankan survey showed.
The 10-year yield eased 1 basis point to 0.760 percent to its lowest level since Aug. 7, while Japan's Nikkei share average shed 0.8 percent.
The 10-year yield fell 6.5 basis points in July-September and is down 22 basis points for the year.
"We will be stuck in this low range (in the 10-year yield) for the good part of next three months. The rationale behind that is the slowdown in growth globally we saw in the tankan report today," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.
"The situation is Europe still hasn't changed. They are muddling through. There is no decisive solution to that. The monetary policy in Japan is still in easing mode."
Ten-year JGB futures rose 8 ticks to 144.27, a seven-week high.
Yields on both 20-year and 30-year debt ticked up 0.5 basis point, to 1.645 and 1.895 percent, respectively. The Ministry of Finance will hold an auction to enhance liquidity on Tuesday, selling 300 billion yen ($3.9 billion) of 20, 30-year debt.
But a fund manager at a European asset management firm in Tokyo said yields on longer-dated bonds had more room to fall versus other sectors.
"There is no room for the shorter-end, three- to five-year, to go down any further. The longer-end will get more benefit," he said.
Merrill Lynch's Fujita also said many life insurance companies, who are buyers of longer-dated debt, remained behind in their purchases of Japanese government bonds in the current financial year ending March 2013, as they were hoping to buy on dips but opportunities had not materialised.
However, he said Japanese politics was the wild card.
"If we do see general election this quarter, if we do see a LDP victory led by (Shinzo) Abe, he is ... going to spend more," he said.
"It's too early to price all these in right now. But if it becomes the case, there is a possibility of bear steepening in the JGB market."