The JGB yield curve kept steepening as superlong bonds such as 20 and 30 years were pressured by investors who bought JGBs on caution before the long holidays unwinding their positions to shift their holdings to shorter maturities ahead of upcoming JGB auctions, traders said.

Superlongs were also partly weighed down by uncertainty over whether the Japanese government will be able to overcome political opposition and implement a sales tax hike to alleviate the country's fiscal woes.

March 10-year JGB futures were up 0.06 point at 142.39 approaching their daily Ichimoku cloud at 142.43, which had been capping futures since late November.

"Yesterday's German bond auction showed improved results compared with the one in November, but it was still subdued and reflected investors' concerns over the euro zone debt crisis," said a trader at a US brokerage. He added that JGBs are likely being underpinned by safe-haven demand, but that investors are only willing to buy on dips, such as levels above 1 percent on the 10-year cash bond yield.

Investors are also looking ahead to US payrolls data on Friday, with the median of forecasts from analysts polled by Reuters indicating employers added 150,000 jobs in December, up from 120,000 new jobs in November.

The 10-year yield inched down 0.5 basis point to 0.985 percent, having kept below 1 percent since mid-December. The five-year yield declined 1 basis point to 0.335 percent, but stayed in the middle of its 0.3-0.4 percent range from the last six months.

WEIGHED DOWN

Some market players said superlongs were weighed down by profit-taking from Japanese banks amid recent improved momentum in stock markets and by broker hedging ahead of upcoming JGB auctions. The 20-year yield was flat at 1.755 percent and the 30-year yield inched up 0.5 basis points to 1.920 percent.

A 300 billion yen ($3.91 billion) liquidity-enhancing sale is scheduled for Friday, through which the Ministry of Finance will sell extra amounts of 20- and 30-year JGBs already in circulation. The MOF will offer 2.2 trillion yen of 10-year JGBs on Jan 12.

The spread between five- and 20-year bond yields expanded to a one-month high of 142 basis points from 141 basis points on Tuesday, approaching a three-month peak of 145 basis points hit on Dec. 1 after a poor German bond auction had sparked fears that investors could start dumping Japanese bonds given Japan's indebtedness.

Although some players were cautious that the upcoming supply schedule would weigh on JGBs, many expect yields to stay rangebound in January.

"With the debate on consumption tax turning into a political issue, it is unlikely that a decision will be made any time soon, keeping the market in a range," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

France plans to raise up to 8 billion euros in long-term debt on Thursday but a key litmus test for investor confidence is next week's debt sales by Spain and Italy, the two countries most exposed to the European financial crisis.