JGBs up on Treasuries but capped by supply concerns

* 5- to 10-yr JGBs, futures up after Treasuries gain

* But gains kept modest by lingering supply concerns

* Superlongs extend losses after Tuesday's weak 20-yr sale

* 5-yr/20-yr spread hits fresh 4-year high

TOKYO, Oct 21 - Japanese government bonds gained modestly on Wednesday, with December 10-year futures bouncing back from a one-month low, after weaker-than-expected U.S. housing starts data lifted U.S. Treasuries.

December futures gained 0.07 point to 138.69, snapping a four-day decline. The contracts hit a one-month low of 138.60 on Tuesday following a poorly-received 20-year JGB auction.

"Investors are tiptoeing into the market to buy back at these levels," said Takafumi Yamawaki, a senior rates strategist at BNP Paribas Securities. "Yields have reached levels that investors set their buying targets at but they are treading carefully as it remains to be seen if the recent rise in yields will develop into a sustained trend."

The yield curve steepened, as five- to 10-year yields declined, while superlong yields edged up. The spread between the five- and 20-year JGB yields widened by 1 basis point to 150 basis points, its steepest in more than four years according to Reuters data.

The likelihood of added issuance during the current fiscal year and uncertainty over issuance plans next year have exerted steepening pressure on the yield curve.

The Bank of Japan's easy monetary policy has helped underpin short to midterm JGB yields but the impact has not extended out to longer dated maturities such as 20- and 30-year bonds.

The market has been bracing for an increase in JGB issuance for a while as tax revenues were expected to fall short of targets, forcing the government to turn to debt to fill the gap.

Nevertheless supply has recently become the main topic of concern as the government has actually begun looking for ways to finance a supplementary budget for the current fiscal year through March 2010 and its spending plans for the next year.

Japan has already upped planned new JGB issuance for the current fiscal year to 44 trillion yen from 33 trillion yen. Participants are now expecting the amount to rise to around 50 trillion to make up for an anticipated six trillion yen tax revenue shortfall.

The government will also be faced with the balancing act of trying to stick to its plan of keeping new JGB issuance below 44 trillion yen while finding funding for next year's budget.

Cabinet ministers last week submitted a record 95 trillion yen in budget requests for fiscal 2010/2011, although the government wants to trim the amount to around 92 trillion yen.

Domestic investors have money to invest in Japan's second fiscal half-year that began this month but are not in a rush to buy debt until the government comes up with further details.

Such a stance was reflected at Tuesday's 20-year JGB auction, which drew tepid investor demand and helped the curve steepen.

"The market was quiet for the most part but the poor auction results continued to exert steepening pressure on both the cash JGB and swap curves," said a trader at a domestic bank.

Market players said dealers who had been stuck with batches of the new 20-year paper bought at Tuesday's sale sold them to lighten their inventories.

The five-year yield dipped 0.5 basis point to 0.625 percent.

The benchmark 10-year yield fell 0.5 basis point to 1.345 percent after touching a six-week high of 1.350 percent on Tuesday.

The 20-year yield climbed 1 basis points to 2.125 percent after touching 2.135 percent, a two-month high.

In addition to the weaker-than-expected housing starts in September, U.S. Treasuries were lifted on Tuesday by an unexpected fall in producer price data and declines on Wall Street.