JGB futures edge up, supported by economy worries

* JGBs supported by worries about economic outlook

* Short-term notes seen supported

* Focus on JGB repo rates

By Masayuki Kitano

TOKYO, Nov 18 (Reuters) - Japanese government bond futures inched higher on Tuesday, supported by worries that the economy may weaken further and market expectations for the Bank of Japan to keep interest rates low in coming months.

The yield curve was seen likely to stay steep, with shorter-term notes supported by this week's dip in JGB repo rates, while super-long bonds may see some selling as dealers prepare for a 20-year bond auction on Thursday.

"The trend of stock market weakness is still in place and yesterday's gross domestic product data showed a contraction for the second straight quarter. Economic fundamentals continue to be weak," said Naomi Hasegawa, senior fixed-income strategist for Mitsubishi UFJ Securities.

December 10-year JGB futures rose 0.19 point to 138.75 2JGBv1 in light trade, with trading volume totalling roughly 3,900 lots as of 0055 GMT.

The benchmark 10-year JGB yield was steady at 1.475 percent JP10YTN=JBTC.

Data released on Monday showed that Japan's gross domestic product contracted 0.1 percent in the third quarter, confirming that Japan's economy had slipped into its first recession in seven years. [ID:nLH194446]

The Bank of Japan seems likely to keep interest rates steady at 0.3 percent at a two-day policy meeting that ends on Friday, and the chances of a rate cut in December also seem low at this point, said Mitsubishi UFJ's Hasegawa.

But some market players may be starting to brace for a possible BOJ rate cut early next year, judging from moves in overnight index swaps since last week, she said.

Such speculation of a possible BOJ rate cut in coming months and this week's dip in JGB repo rates are likely to lend support to shorter-term JGBs, Hasegawa said.

Two-year JGBs were untraded so far on Tuesday according to Japan Bond Trading Co Ltd data, after falling to an eight-month low of 0.520 percent on Monday JP2YTN=JBTC.

Overnight index swaps JPONIBOJ=TRDT suggest that investors see a roughly 20 percent chance of a 25 basis point BOJ rate cut by year-end, and the implied probability rises to roughly 30 percent early next year. (Reporting by Masayuki Kitano; Editing by Chris Gallagher)