JGB futures hit 7-week high; eyes on equities, yen

* JGBs broadly higher, 10-yr yield lowest since early Oct

* MOF's two-yr JGB auction seen likely to meet solid demand

* Weak Tokyo shares, rise in yen support JGBs

By Masayuki Kitano

TOKYO, Nov 25 - Lead 10-year Japanese government bond futures edged up to a seven-week high on Wednesday, supported by a lacklustre performance from Tokyo stocks and the yen's rise against the dollar.

JGBs have rallied over the past couple of weeks, reversing course after selling off earlier in November on worries over rising debt issuance.

While uncertainty about the size of JGB issuance in the next fiscal year remains, JGBS are finding support from large redemptions of cash JGBs due later this year and the government's declaration last week that the economy is back in deflation for the first time since 2006, market players said.

"Reasons to buy yen bonds are piling up more than reasons to sell," said a portfolio manager for a Japanese insurer. Such factors include the recent weakness of Japanese share prices and the yen's rise against the dollar, he said.

December 10-year JGB futures rose to as high as 139.63 <2JGBv1>, the highest for a lead futures contract since Oct 5.

After trimming some gains, December futures were 0.16 point higher at 139.60.

The benchmark 10-year JGB yield dipped 1 basis point to 1.280 percent <JP10YTN=JBTC>, their lowest in nearly seven weeks.

In other markets, the Nikkei share average touched a four-month intraday low, while the yen hit a seven-week high against the dollar. [.T] [FRX/]

A rise in the yen is seen as supportive for JGBs as it can raise concerns about the outlook for Japanese exporters' earnings and also because it can lower import prices and add to any deflationary pressure.

The Ministry of Finance offered 2.6 trillion yen ($29.4 billion) in two-year JGBs with a coupon rate of 0.3 percent, unchanged from an auction of the same maturity last month.

Although the issuance amount was increased by 200 billion yen starting from Wednesday's auction, the new two-year notes are likely to attract solid demand, analysts said.

Results are due at 0345 GMT. <TENDER01>

The increase in two-year JGB issuance stems from MOF's decision in October to reallocate some of the JGB issuance originally intended for retail investors to the institutional market because of weak retail demand. [ID:nT78079]

Short-term JGBs have performed better than longer-end JGBs this year, as they drew support from market expectations for the Bank of Japan to hold off from raising interest rates for the next few years as deflation is seen likely to persist.

Another supportive factor for two-year notes is the fact that they now look less expensive compared to the 10-year sector, due to a recent drop in 10-year yields, said Naomi Hasegawa, senior fixed income strategist for Mitsubishi UFJ Securities.

The two-year/10-year yield spread now at 104.5 basis points, down from a 3-½ year high of 121 basis points hit earlier in November. ((masayuki.kitano@thomsonreuters.com; Reuters Messaging: masayuki.kitano.reuters.com@reuters.net; +81-3-6441-1872)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))