JGBs sag on supply concerns, 20-year sale eyed

* Uncertainty over extra issuance continues to dog JGBs

* 10-year yield climbs to one-month high of 1.340 pct

* Market awaits 20-year JGB sale with measured optimism

* Curve flattens ahead of 20-year auction

TOKYO, Oct 19 - Japanese government bonds dipped on Monday, weighed down 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 0.05 point to 138.83, unable to retain gains after rising to 138.99 in response to weaker Tokyo stocks and gains in U.S. Treasuries. 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 last week presented record budget requests totalling more than 95 trillion yen ($1.05 trillion) for the fiscal year starting next April.

The government has said it wants to rein in bond issuance in 2010/11 to below the 44 trillion yen earmarked for the current fiscal year, but that goal looks increasingly difficult to achieve in the wake of likely tax revenue shortfalls.

Chief Cabinet Secretary Hirofumi Hirano told reporters on Monday that the government wanted to reduce the 2010/11 budget to below 92 trillion yen, but he drew little reaction from the bond market.

The JGB yield curve flattened a touch as 20- and 30-year bond yields defied the trend and were flat to a touch lower. Despite the worries 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 billion) of 20-year JGBs on Tuesday.

The auction is seen as a test of investor demand at a time when supply concerns are dogging the market, and market participants awaited the tender with measured optimism.

"A smooth auction is expected as the 20 years have cheapened significantly. The supply issue is a longer-term concern for the market, but the auction is not necessarily being associated with it," says Noriyuki Fukuda, a fixed-income strategist at Morgan Stanley.

Some analysts said 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 there was 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 1 basis point to 0.625 percent. The benchmark 10-year yield rose 1.5 basis points to 1.340 percent, its highest since mid-September.

The 20-year yield dipped 0.5 basis point to 2.095 percent. It hit a three-month trough of 1.980 percent on Oct. 8 before rising to a seven-week high of 2.100 percent on Friday.

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

The five-year/20-year yield spread was at 147 basis points from 148 basis points on Friday, its widest in four years according to Reuters data.

The Nikkei shed 0.2 percent following losses on Wall Street in the wake of weak corporate earnings.

U.S. Treasuries gained on Friday as Wall Street slipped.