* 5-yr auction meets strong demand as expected, with tail of zero
* 10-yr futures slip but pare losses, end well above session low
* Agreement on Japan deficit-financing bill supports sentiment
By Lisa Twaronite and Hideyuki Sano
TOKYO, Nov 13 Benchmark Japanese government bond prices edged lower on Tuesday amid speculation that Prime Minister Yoshihiko Noda may soon dissolve the parliament and hold a snap election by the end of year, though the superlong tenor rebounded on bargain hunting.
Bond market sentiment was supported by solid results at a sale of 5-year notes, which helped bring benchmark yields off their session high.
Opinion polls have shown the conservative opposition Liberal Democratic Party is expected to beat Noda's Democratic Party of Japan. Some market players worry the LDP is less committed to fiscal belt-tightening.
Market players also expect LDP leader Shinzo Abe to increase pressure on the Bank of Japan to expand monetary easing with an inflation target of 3 percent.
"The market is clearly reacting to the news that dissolution of the parliament is likely. At the moment, Abe looks set to become next prime minister and he is likely to put more pressure on the BOJ," said a trader at a Japanese bank.
But the fact that some bargain hunting emerged in the superlong sector, which is usually the most sensitive to political concerns, suggests that not all market participants are worried about the future.
"No matter who becomes Japan's next Prime Minister, he will keep strong pressure on the BOJ to do more," said Le Ngoc Nhan, a strategist at Morgan Stanley MUFG.
"The fundamental driver is not within the JGB market anymore, as far as I can see. The drivers are not political. That's secondary to movements in forex and equities markets," Nhan said.
The superlong sector had underperformed in recent weeks on fears of a ratings downgrade over a political standoff on passing a deficit-financing bill needed to fund this fiscal year's budget. On Tuesday, the DPJ and two major opposition parties reached an agreement on the bill.
The 10-year JGB futures contract fell as low as 144.47 at one point in the morning session, before paring losses and closing the day at 144.54, down 0.04 ticks.
The 10-year yield stood at 0.730 percent, up half a basis point from Monday's settlement yield of 0.725 percent, though there was no trade at that level on Monday. It earlier rose as high as 0.735 percent.
The 5-year note rallied after the strong auction, its yield falling 1 basis point to 0.185 percent.
The Ministry of Finance offered 2.5 trillion yen of 5-year bonds, reopening issue number 106 with a coupon of 0.2 percent, matching coupons of the past six sales.
The sale drew bids of a robust 4.96 times the amount offered. That was down from 5.51 at last month's sale of that maturity, which was the highest ratio since the 5-year note was introduced in February 2000.
The auction's tail between the average and lowest accepted prices was zero, matching that of last month's offering and also indicating strong demand.
Yields on 30-year bonds lost half a basis point to 1.900 percent, while yields on 20-year debt were flat at 1.645 percent, down from their earlier high of 1.655 percent.