JGBs slide on spending and BOJ prospects, short-term yields hit 17-year high

(Updates prices, adds auction results in paragraph 4, analyst comments in 5-6 and 9-10)

By Rocky Swift and Junko Fujita

TOKYO, Nov 26 (Reuters) - Japanese government bonds (JGBs) slid on Wednesday, with short-term yields touching 17-year highs, as investors weighed the financial burden of a massive stimulus and chances for a near-term rate hike by the central bank.

The benchmark 10-year JGB yield rose 0.5 basis point (bp) to 1.805%, after a 2.5 bps increase in the previous session. The two-year yield rose 1 bp to 0.975%, and the five-year yield touched 1.34%, both the highest since June 2008.

The Ministry of Finance sold about 400 billion yen ($2.57 billion) in 40-year JGBs, the nation's longest tenor, a week after yields on the debt surged to a record high on concerns over the size of Prime Minister Sanae Takaichi's economic stimulus plan.

The auction's bid-to-cover ratio, a measure of demand, was 2.59, about even with the previous sale in September, and above average over the past year. At 3.555%, the highest accepted yield was the steepest on record.

"The bid-to-cover ratio was not particularly good or bad, but it signalled that investors are not confident in buying super-long-dated bonds," said Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

"It looks as though a segment of investors was attracted by the yield levels."

The 40-year yield fell 1 basis point to 3.680% after the auction, reversing from an increase earlier in the session.

Japan's cabinet on Friday approved a 21.3 trillion yen spending package, significantly larger than the previous year's. Takaichi has said the plan would be funded with new bond issuance if tax revenue is not sufficient, and overall JGB issuance is expected to be smaller than last year's.

"Investors clearly have questions on whether capital markets and Tokyo can handle the additional spending and the conflicting dynamics between lawmakers and policymakers," said Kristian Kerr, head of macro strategy for San Diego-based LPL Financial.

"The coming weeks will test the yen and JGB yields, as well as the Takaichi administration."

Shorter-term yields have also been on the rise on expectations the BOJ may be closer to raising its policy rate.

A change in BOJ messaging over the past week has shifted focus back to the inflationary risks of a weak yen, comments aimed at reminding markets that a December rate hike was still possible, two people familiar with the bank's thinking told Reuters.

($1 = 155.9000 yen) (Reporting by Rocky Swift and Junko Fujita; Editing by Subhranshu Sahu)