* Fear on European debt crisis leads to safe-haven demand for JGBs
* 2-year bond yield hits 7-yr low of 0.09 pct
* Many expect uptrend to continue, some see 10-yr yield below 0.65 pct
By Hideyuki Sano
TOKYO, July 25 (Reuters) - Japanese government bond prices ticked up on Wednesday, with the 10-year yield matching nine-year lows hit earlier in the week, as Spain's soaring borrowing costs deepened pessimism on Europe's debt crisis.
The two-year JGB yield fell to a seven-year low, which market players said is likely to reflect safe-haven buying from foreign investors as Spanish and Italian bonds were hammered and even German bunds came under threat of credit downgrades.
"There are not many sovereign bonds you can buy these days. So JGBs could rise much more than many Japanese market players expect," said a trader at a Japanese bank.
The benchmark 10-year JGB futures rose 12 ticks to 144.63 , though they failed to break above nine-year high of 144.64 hit earlier this week. Trade was slow with only 16,424 contracts traded -- about 40 percent below the average so far this year.
The 10-year cash bond yield fell 1.0 basis point to 0.720 percent, matching the nine-year low hit earlier this week, but it is still a fair distance from its record low of 0.430 percent set on June 11, 2003.
"It seems to me that Greece is on course to leave the euro. I also doubt policymakers can handle Spain's debt crisis well. The 10-year JGB yield is likely to fall below 0.65 percent in coming weeks," said Takeo Okuhara, fund manager at Daiwa SB Investments.
Spain paid the second highest yield on short-term debt since the birth of the euro at an auction and EU officials said Greece had little hope of meeting the terms of its bailout, casting fresh doubt on its future in the euro zone.
The longer end of the yield curve underperformed partly ahead of a 1.2 trillion yen ($15.4 billion) 20-year JGB auction on Thursday.
The 20-year yield was flat at 1.540 percent while the 30-year yield rose 1.0 basis point to 1.770 percent , bucking the overall market move.
Yields on "superlong" bonds such as 20- and 30-year bonds have fallen less than the 10-year sector in the latest rally in the past few months because domestic players have avoided taking duration risk in the financial year that started in April.
While the 10-year yield has already fallen way past its 2010 low of 0.820 percent, the 30-year yield is still far above its 2010 low of 1.535 percent.
"It doesn't look like domestic players are buying aggressively. In 2010, major banks bought superlongs big time but they aren't doing so this time. It's a bit like people are drinking, but they aren't drunk enough to start on the tequila yet," said another trader at a Japanese bank.
The two-year yield, however, fell to 0.09 percent , the lowest since July 2005, due to safe-haven buying from investors.
Market players suspect buying is likely to have come from investors, quite possibly foreign ones, as players that have accounts at the Bank of Japan -- banks and many brokerages -- can earn 0.10 percent interest on their deposit at the BOJ and have no incentive to buy bonds yielding less.
Still, with German two-year bond yields constantly negative these days, that yield could be attractive to investors.
"Buying probably came from sovereign wealth fund managers who want to shun Europe, rather than European investors themselves," said the first Japanese bank trader.
Comments from Bank of Japan Deputy Governor Hirohide Yamaguchi that the bank will not hesitate to easy policy further had no impact on the market. (Reporting by Hideyuki Sano; Editing by Eric Meijer)