* Large number of unknown bidders at sale suggests banks bought
* Superlong tenor erases early losses
By Lisa Twaronite
TOKYO, Aug 21 (Reuters) - Japanese government bonds rose on Tuesday after a sale of 5-year notes was as strong as expected, though market participants were wary of supply conditions on the longer end of the curve ahead of a 20-year sale later in the week.
The Ministry of Finance will offer 1.2 trillion yen worth of 20-year debt on Thursday. On Tuesday, it sold 2.28 trillion of 5-year notes, reopening Series 105 with a 0.2 percent coupon, at a lowest accepted price of 99.83 against market expectations around 99.81.
The bid-to-cover ratio was 3.28, down from the previous sale's 4.44 and slightly below the average for the past year of 3.48. But the tail was zero, the same as those of the past two sales, indicating firm demand.
Some 607 billion yen of the notes were sold to unknown bidders, a fairly large amount which presumably came from banks, said Tadashi Matsukawa, head of Japan fixed income at Pinebridge Investments.
"The 5-year sale was okay, but the there's more work to do in terms of the 20-year auction," said Matsukawa.
"That's more difficult that the 5-year, because it's a longer duration and limited number of participants, and it's an uncertain period for interest rates right now."
Benchmark JGB yields rose to a two-month high last week as investors' expectations rose that Europe would take steps to stem its debt crisis. The European Central Bank will hold a policy meeting on Sept. 6, and euro zone finance ministers will also meet in mid-September.
Yields on the 5-year note shed half a basis point to 0.230 percent in post-auction trade.
The superlong tenor erased losses after facing mild selling pressure in the morning, with yields on 20-year debt losing 1 basis point to 1.660 percent, while yields on 30-year bonds were flat at 1.860 percent.
"I expect to see some more curve steepening this week as investors sell ahead of the 20-year sale," said a fund manager at a European asset management firm in Tokyo.
The 10-year cash yield, which was also flat as of midday, skidded 2 basis points to 0.820 percent, moving back toward a nine-year low of 0.720 percent hit last month.
Ten-year JGB futures closed up 0.15 point at 143.62 after ending the morning session flat. But futures were still well short of their 14-day moving average, now at 143.89.
Volume was moderate, with 31,720 contracts trading, topping last week's average of 28,724 contracts.
Weaker stocks also helped JGB market sentiment as investors sought the safety of fixed-income assets. The Nikkei share average retreated from a three-month high to lose 0.2 percent.