(Corrects coupon on 10-year bond to include missing decimal point)
* Hopes for G7 phone conference spurs profit-taking
* 10-yr futures end at session low on hedge selling after auction
* Yield curve steepens as superlongs outperform
TOKYO, June 5 (Reuters) - Japanese government bonds extended losses on Tuesday after an auction of 10-year notes met only mediocre demand, as a rise in risk appetite lessened the appeal of fixed-income assets with benchmark yields close to 9-year lows.
Equities markets rebounded ahead of an emergency conference call later on Tuesday in which finance chiefs of the Group of Seven leading industrialised nations are slated to address the euro zone’s deepening debt crisis.
While many strategists are skeptical that any concrete steps will emerge from the call, some investors used hopes for progress as an opportunity to take profits after Europe-spurred rallies in U.S. Treasuries as well as German bunds sent yields to historical lows late last week.
This carried over into Asian trading and added to pressure on JGBs as investors positioned for the sale, although some strategists cautioned that the poor outcome might not herald a major correction.
“We can’t draw conclusions about what one poor auction means for demand, in light of so much uncertainty surrounding European events,” said Credit Suisse strategist Shinji Ebihara.
The 10-year JGB yield added 4 basis points to 0.855 percent. Benchmark yields dipped to 0.790 percent in the previous session, their lowest level since July 2003.
The 10-year JGB futures contract ended down 0.38 points at a session low of 143.41, as dealers who bought at the disappointing auction sold futures to hedge their position.
On Monday, futures rose as high as 144.06, the highest level for the front-month contract since October 2010.
The offering of 2.3 trillion yen of 10-year notes carried a 0.9 percent coupon, matching that of the previous sale.
It garnered a lowest price of 100.33, slightly below market expectations. The tail between the average and lowest accepted prices widened to 0.07, from 0.01 at the past five monthly 10-year sales.
The bid-to-cover ratio slipped to 2.95 from last month’s 3.74 and also came in below the 3.10 average of the past year’s sales.
“It was on the weak side, and it has all to do with the European and U.S. market correction last night,” said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch.
“This poor auction could potentially fuel some bad auction results this week and next week, but that said, unless we see an outright resolution to Europe - which I don’t see happening anytime soon - we won’t see the flight to quality reverse itself,” he said.
Japan’s finance ministry will also auction 700 billion of 30-year bonds on Thursday, followed by 5- and 20-year bonds next week.
The yield curve steepened, with the 20-year JGB yield adding 4.5 basis points to 1.680 percent and the 30-year JGB yield also adding 4.5 basis points to 1.835 percent.
$1 = 78.463 yen Reporting by Lisa Twaronite; Editing by Richard Pullin