TOKYO, June 2 (Reuters) - Japanese government bond

yields dropped sharply after the 10-year government bond auction

saw a stronger-than-expected outcome, prompting traders to scoop

up the debt.

The benchmark 10-year JGB yield fell 11 basis

points (bps) to 2.57%, its lowest since May 13. Yields move

inversely to bond prices.

"Investors who were not able to buy the 10-year bonds at the

auction bought the debt, which pushed the yields lower," said

Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ

Asset Management.

"But it is questionable whether this momentum will last for

a long time. Given the pace of inflation in Japan and potential

growth, the 10-year yield looks low," he added.

The finance ministry auctioned about 2.6 trillion yen

($16.28 billion) of 10-year bonds earlier in the day. Its lowest

accepted price exceeded market expectations, indicating a strong

result.

The 10-year government bonds have been underperforming other

tenors, in part due to the absence of core buyers, strategists

said.

"The rise of the yields on two- and five-year bonds was

limited also because they have already priced in the expected

interest rate hikes by the Bank of Japan," said Katsutoshi

Inadome, senior strategist at Sumitomo Mitsui Trust Asset

Management.

Longer maturity bonds have also seen limited increase in

yields as concerns over worsening fiscal health eased amid

reports on the size of the extra budget, while the ongoing

reduction in the issuance of super-long ends helped improve

demand for those bonds, strategists said.

The 30-year yield fell 7.5 bps to 3.845%, but

traded higher than the 3.745% yield on the 40-year JGB

, which slipped 7 bps.

"The inversion is a sign that yields are formed based on

supply and demand," said Keisuke Tsuruta, senior fixed income

strategist at Mitsubishi UFJ Morgan Stanley Securities.

"The ministry has been cutting the issuance of the 40-year

bonds, and the size of the issuance is much smaller than

others," he added.

The 20-year JGB yield fell 9 bps to 3.5%.

The two-year yield was down 2.5 bps to 1.375%.

The five-year yield fell 6 bps to 1.855%.

($1 = 159.7100 yen)