JGBs sag on supply concerns, 20-yr sale eyed

TOKYO, Oct 19 - Japanese government bonds dipped on Monday, weighed by supply concerns stemming from uncertainty about how much extra debt the government will have to issue to fund its spending programmes.

* December 10-year futures fell 0.03 point to 138.85, unable to retain gains after initially rising to 138.99 in response to weaker Tokyo stocks. The contracts touched a three-week low of 138.78 on Friday.

* "It is difficult for participants to react to potentially positive factors while supply concerns smoulder in the background," said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities.

* Prime Minister Yukio Hatoyama's cabinet ministers last week presented record budget requests totalling over 95 trillion yen ($1,045 billion) for the fiscal year starting in April 2010.

* The government has said it wants to rein in bond issuance in 2010/2011 to below the 44 trillion yen earmarked for the current fiscal year, but the goal looks increasingly difficult to achieve in the wake of likely tax revenue shortfalls.

* The JGB yield curve flattened a touch as 20- and 30-year bonds defied the trend to eke out gains. Despite the worriess over extra supply, superlongs still appear a bargain to some investors after sharp rises in yields the previous week, market players said.

* Japan's Ministry of Finance will offer 1.1 trillion yen ($12.1 billion) of 20-year JGBs on Tuesday and the auction is being eyed as a test of investor demand at a time when supply concerns are dogging the market.

* The 20-year yield has pulled back significantly from a three-month low struck earlier in the month but some analysts say yield levels may still be too low to attract strong demand from the main buyers of the maturities such as life insurers.

* Others, however, said that there is relief that the coupon on the new 20-year is now likely to be set at 2.1 percent instead of the 2.0 percent that investors had braced for earlier in the month.

* The five-year yield edged up 0.5 basis point to 0.620 percent. The benchmark 10-year yield rose 1 basis point to 1.335 percent.

The 20-year yield dipped 0.5 basis point to 2.095 percent. It touched a seven-week high of 2.100 percent on Friday after hitting a three-month trough of 1.995 percent on Oct. 8.

* The 30-year yield fell 1 basis point to 2.245 percent.

* The Nikkei shed 1.1 percent following losses on Wall Street in the wake of weak corporate earnings.