* Yield curve steepens as superlong tenor underperforms
* 10-yr yield briefly marks 3-week high after 20-yr sale results
By Lisa Twaronite
TOKYO, Sept 13 (Reuters) - Japanese government bond prices fell on Thursday as potential buyers grew cautious ahead of a U.S. Federal Reserve decision, with the yield curve steepening as longer maturities dropped after a 20-year sale.
Expectations rose that the Fed Federal Reserve would announce a third round of bond purchases, known as quantitative easing or QE3, at the end of its two-day meeting on Thursday. A Reuters poll showed economists raised their bets on QE3 to 65 percent from 60 percent in August.
Any further stimulus steps would likely increase investor risk appetite and lift stocks, keeping demand for fixed income assets in check, market participants said.
Caution was evident in trading after the auction results were announced. At first, JGB futures rose on indications that the sale met strong demand, but then they followed cash bonds lower as follow-through buying failed to emerge.
“The expectations for the auction weren’t that great, so it went off okay, but the follow-through wasn’t there,” said Maki Shimizu, senior strategist at Citigroup Global Markets Japan.
“Today was just before the FOMC result, and the basic global theme has yet to turn around. People have to be careful, and confirm the direction of yields,” she said.
“Still, the potential demand for this sector is there, from people like life insurers who look at the absolute level,” she added.
The 10-year JGB futures contract for December ended down 0.20 point at 143.60 after dropping as low as 143.48 after the auction results.
The yield on the benchmark 10-year cash bond rose 2 basis points to 0.825 percent after hitting a three-week high of 0.835 percent.
The Ministry of Finance offered 1.2 trillion yen in 20-year bonds with a coupon of 1.7 percent, higher than the previous sale’s 1.6 percent. The higher coupon helped demand, pushing the bid-to-cover ratio to a two-year high of 4.54 for a sale of that maturity, up from the previous auction’s 2.38.
The tail between the average and lowest accepted prices narrowed to 0.08 from the previous sale’s 0.24, also indicating stronger demand.
Still, the 20-year bond yield added 2.5 basis points to 1.675 percent. The 30-year yield rose 3 basis points to 1.905 percent.
JGBs were also pressured by weaker U.S. Treasuries, which dropped on Wednesday after a German court ruling raised hopes of progress on Europe’s debt crisis.
Germany’s Constitutional Court gave the green light for the country to ratify Europe’s new bailout fund, boosting hopes that the single currency bloc is finally putting in place the tools to resolve its three-year old debt crisis.