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* 10-year JGB futures hit their highest level since May 10
* 10-20 year spread hits 4-month high
* Five-year yield touches six-week low
* 20-yr yield up 1 bp, 30-yr up 1.5 bps
By Dominic Lau
TOKYO, July 23 (Reuters) - Yields on 10-year benchmark Japanese government bonds slipped to two-months low on Tuesday as some investors were forced to cover their bearish positions after the weekend's election result failed to spark a rise in yields as they had expected.
Gains in the 10-year JGB prices and futures were trimmed in the afternoon session as the Nikkei share average rose.
The 10-year yield was down 0.5 basis point at 0.780 percent, having earlier hit 0.770 percent, its lowest since May 14.
Ten-year JGB futures were up 0.06 point to 143.70, having earlier risen to 143.85, the highest in more than two months. Trade was active, with 19,058 contracts changing hands, up from Monday's 17,107 and last week's daily average of 17,408.
"A lot of the players had expected the yields to go up after the election," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.
"They are probably just being squeezed out ... A lot of banks have sold a lot of the 10-year paper."
Prime Minister Shinzo Abe's ruling bloc scored a decisive win in Sunday's upper house election, strengthening his mandate to push for reforms to revive the flagging economy.
Market participants have said some investors might have worried that if Abe's Liberal Democratic Party secured a majority on its own, the Nikkei would rally hard and hurt JGBs.
The fall in the 10-year yield meant the spread to 20-year yields widened to a four-month high of 93.5 basis points, and the spread to 30-year debt rose to a two-month high of 106 basis points.
Longer term, the steepening also reflects signs of economic improvement pushing up longer-dated yields and the impact of Bank of Japan bond-buying capping yields on short- to medium-maturities.
On Tuesday, the government raised its view on the economy for a third straight month in July and said deflation was abating as a result of the expansionary policy mix of monetary stimulus and generous spending.
The 20-year yield rose 1 basis point to 1.715 percent, reversing earlier decline to 1.700 percent, and the 30-year yield was up 1.5 basis points at 1.840 percent.
Matsukawa said some pension funds were seen buying the 20-year sector ahead of a 1.2 trillion yen ($12.1 billion) auction of 20-year JGBS on Thursday.
"When money comes in, (passive pension funds) will put some of the money into play. They don't speculate on timing," he said.
The five-year yield was steady at 0.270 percent after earlier edging down 0.5 basis point to 0.265 percent, a six-week low.
"While yield declines could obviously raise volatility too, the BOJ's heavy-handed JGB purchases are slowly pushing yield ranges downward in the bond market, despite a continuing release of healthy economic data," Royal Bank of Scotland analysts said in a note.
"We maintain our existing stance of selling the rally when 10-year JGBs trade in the range of 0.7 percent range, in light of the risk balance," it said, pointing to the possibility of further domestic stimulus steps, a tapering of the U.S. Federal Reserve's easing and Germany's elections.