JGBs gain, with superlongs outperforming on month-end buying
* Ten-year JGB yield down 0.5 basis point, reversing early rise
* Yields on superlongs down 2-2.5 basis points on month-end buying
TOKYO, June 26 (Reuters) - Benchmark Japanese government bond prices inched higher on Wednesday, supported by a sharp fall in Tokyo shares on concerns over China's cash squeeze, while longer-dated debt outperformed on the back of month-end buying by life insurers and pension funds.
The 10-year yield edged down 0.5 basis point to 0.860 percent after earlier rising as much as 0.885 percent because data, including a gauge of business spending and consumer confidence, showed the U.S. economic recovery gained encouraging momentum.
But persistent concerns over growth in China, Japan's second biggest export market, after its central bank engineered a cash squeeze to rein in rapid credit expansion, prompted Japanese retail investors to dump small- and mid-cap stocks on Wednesday, triggering further selling by hedge funds.
Japan's Mothers index, comprised of small to mid-sized firms, slumped 11.6 percent, dragging the benchmark Nikkei down 1 percent.
The sell-off came despite the People's Bank of China saying late Tuesday that it had given cash to some institutions facing temporary shortages and would continue to do so if needed, in a bid to assure markets.
"I see higher downside risk for JGBs in the next couple of weeks," said Akito Fukunaga, chief rates strategist at Royal Bank of Scotland in Tokyo.
Fukunaga said JGBs had been relatively stable despite the recent sharp rise in U.S. Treasury yields. He said the main reason was there has been no new JGB issuance since the Fed's policy meeting this month.
"If we look at the inter-dealer broker market, there is very small volume ... low liquidity, just BOJ buying regularly," Fukunaga said.
He added that JGBs would face a test when the finance ministry sells 2.4 trillion yen ($24.6 billion) worth of 10-year bonds next Tuesday, followed by an auction of 30-year bonds on July 4.
Ten-year JGB futures added 1 tick to 142.25, with 20,592 contracts changing hands, sharply below this year's daily average of 30,4091 contracts.
Longer-maturities outperformed, with the 20-year yield down 2 basis points to 1.710 percent and the 30-year yield down 2.5 basis points to 1.825 percent.
The spread between 10- and 20-year yield narrowed to 84.5 basis points after hitting a more than six-week high of 89 basis points on Monday.
"With uncertainty surrounding the outlook for the Chinese banking system remaining strong, we believe the 10-year sector could come under pressure to correct ahead of next week's 10-year JGB auction," Barclays Securities wrote in a note.
"In this context, the 10-20-year sector may face flattening pressure for now," it said.
The two-year yield added 0.5 basis point to 0.145 percent ahead of Thursday's 2.9 trillion yen debt auction of similar maturities.