JGBs fall as issuance concerns hurt 20-yr auction

* JGBs extend losses after weak 20-year debt auction

* Investors shy away from new debt due to issuance worries

* Finmin says govt to issue more debt to cover tax shortfall

* Investors await details of debt issues for this FY and next

TOKYO, Oct 20 - Japanese government bonds fell on Tuesday, with the 20-year yield hitting a two-month high, as investors shied away from buying newly auctioned paper while they awaited details on the government's plans to increase bond issuance.

The yield curve steepened, with the 5-year/20-year yield spread rising to 148.5 basis points, matching a four-year high hit in mid-September and touched again last week.

Finance Minister Hirohisa Fujii said the government would sell more bonds to cover an expected tax revenue shortfall for the fiscal year ending in March 2010, and those remarks refocused the market's attention on forthcoming debt issuance.

Fujii said he could not say how much in extra bonds the government will have to issue, but added that tax revenues for the current fiscal year may fall below 40 trillion yen ($441 billion), more than 6 trillion yen below an initial estimate.

Fujii also said the government would keep new JGB issuance in fiscal 2010/11 below 44 trillion yen.

Market players have been well aware of the likelihood that the government would have to increase debt issuance to institutional investors in the current fiscal year to offset the tax revenue shortfall, and also to make up for weak household demand for JGBs.

But investors likely feel little need to rush to buy JGBs until the specifics of such expected increases in issuance become available, and an auction of 20-year JGBs attracted weak demand as a result, market players said.

"There is a lot of uncertainty regarding how much debt issuance there will be later this fiscal year and also in the next fiscal year," said a portfolio manager for a Japanese insurer.

"Because of such uncertainty there is mood where it is hard to buy, even if JGBs are at levels where people may want to do so," he said. The 20-year JGB yield hit a two-month high of 2.125 percent at one point. After trimming some losses, the 20-year JGB yield stood at 2.115 percent, having risen 2.5 basis points on the day.

The benchmark 10-year JGB yield hit a one-month high of 1.350 percent. After trimming some losses, it stood at 1.345 percent, up 1 basis point on the day.

Lead December 10-year futures fell 0.21 point to 138.62.

A rise in Tokyo share prices added to pressure on JGBs, which have retreated since rallying in early October.

Market players may have gotten carried away with the rally in JGBs earlier this month, and an accumulation of long positions at that time may be one reason why demand for JGBs has been weak over the past couple of weeks, said a trader for a major Japanese bank.

ISSUANCE WORRIES

The Ministry of Finance's auction of 1.1 trillion yen in 20-year JGBs with a 2.1 percent coupon produced a tail of 0.18, the widest tail since a 20-year JGB auction held last December. The tail is the difference between the lowest and average price at an auction, and a wide tail is a sign of weak demand.

"There are growing worries about whether the Democrats can keep bond issuance below 44 trillion yen next year," said Tomohiko Katsu, deputy general manager of the capital markets division at Shinsei Bank, referring to Japan's ruling political party.

"There's also some shock that the government won't use what it cut from the extra budget to offset debt. This is prompting investors to hold off on buying bonds," Katsu said.

The MOF is due to meet with JGB market primary dealers on Friday, and the meeting may provide some clues on the size of extra debt issuance for the current fiscal year and how such issuance may be allocated among various maturities, market players said.

JGBs may regain some ground once such details become clear, although investors will also want to get a sense of what monthly issuance amounts will be like in the 2010/11 fiscal year that starts next April, said the portfolio manager for a Japanese insurer.

"The type of move we may see is for JGBs to be sold on concerns about extra issuance and to be bought back once the extra issuance actually starts," he said.

That would be similar to what happened earlier this year, after the government decided to increase JGB issuance to help pay for fiscal stimulus.

The 10-year JGB yield hit an eight-month high of 1.560 percent in June, just before extra debt issuance to help pay for economic stimulus began to hit the market.