JGBs dip; 2-yr/10-yr spread matches 3-year high

* JGB 10-yr yield hits 3-mth high, futures touch 3-mth low

* Two-yr/10-yr yield spread matches 3-yr high hit in June

* Debt issuance uncertainty weighs on JGBs

* Trade subdued ahead of U.S. jobs data

* Eyes on next week's 5-yr auction

By Masayuki Kitano

TOKYO, Nov 6 - Ten-year Japanese government bond futures hit a three-month low and the two-year/10-year yield spread matched its widest level in three years on Friday, hurt by underlying worries about rising debt issuance.

The benchmark 10-year JGB yield touched a three-month high, a day after an auction in the maturity met with weak demand as investors shied away from the newly sold debt due to worries about the size of debt issuance in the rest of the fiscal year and next year.

The Ministry of Finance said last week that it would increase its issuance of JGBs to the market through regular auctions by 2.1 trillion yen to 132.3 trillion yen for this fiscal year, to offset weak demand for JGBs among retail investors. [ID:nT78079]

Investors are bracing for the possibility of further increases in debt issuance this fiscal year to offset an expected tax revenue shortfall.

They are also awaiting details on the size of debt issuance for fiscal 2010/11, which starts next April.

Analysts estimate that debt issuance to the market through regular auctions may rise to anywhere from 142 trillion yen to 144 trillion yen in fiscal 2010/11, or possibly higher.

"It is difficult for definitive factors related to this to emerge at this point, and investors may be cautious because of that," said Takafumi Yamawaki, interest rate strategist at BNP Paribas Securities.

Lead December 10-year JGB futures dipped 0.04 point to 137.56 <2JGBv1>, after hitting a three-month low of 137.47 earlier.

The benchmark 10-year JGB yield edged up 0.5 basis point to 1.450 percent <JP10YTN=JBTC>. Earlier, the 10-year yield hit a three-month high of 1.455 percent.

CURVE STEEPENS

Trade was subdued ahead of U.S. jobs due later on Friday, and market players said JGBs drew some support from the fact that gains in Tokyo share prices <.N225> turned out to be milder than the rise in U.S. equities the previous day.

Two-year JGBs outperformed, with the two-year yield dipping 1 basis point to 0.265 percent <JP2YTN=JBTC>.

The two-year/10-year yield spread widened to 118.5 basis points, matching a three-year high hit in June.

The yield curve has steepened this year, with longer-term bonds pressured by debt issuance concerns, while short-term notes have been supported by market expectations for the Bank of Japan to keep interest rates at 0.1 percent for a while.

Next week, focus will turn to a 40-year JGB auction on Tuesday and a five-year auction on Thursday.

Given how this week's 10-year JGB auction turned out, there could be concerns about the level of demand at these auctions, said Akito Fukunaga, a fixed-income strategist for Credit Suisse.

The five-year auction will be in the spotlight, since it will be the first to be carried out with an increased issuance amount that the MOF decided on last week.

The MOF is increasing the monthly issuance amount of five-year JGBs by 100 billion yen to 2.4 trillion yen.