TOKYO, July 1 (Reuters) -

Japanese government bonds rose following strong demand at an

auction for 10-year bonds, prompting investors to cover short

positions.

The 10-year JGB yield fell 4 basis points

(bps) to 1.39% after the auction outcome was announced.

Bond yields move inversely to prices.

The bid-to-cover ratio was 3.51 times the amount sold, lower

than the 3.66 ratio at the previous auction, the finance

ministry's data showed.

But the lowest accepted price was higher than the market

forecast, signalling a robust outcome, strategists said.

"The strong outcome was a surprise and the market covered

short positions they made ahead of the auction," said Tomoaki

Shishido, senior rates strategist at Nomura Securities.

There seemed to be a significant number of institutions that

bought the bonds directly from the ministry, said Katsutoshi

Inadome, senior strategist at Sumitomo Mitsui Trust Asset

Management.

"Such institutions typically hold the bonds for the long

term. They wanted to do so because prospects for the Bank of

Japan's rate hike are weak," Inadome said.

The 20-year JGB yield fell 3 bps to 2.32%.

The 30-year JGB yield fell 0.5 bp to 2.905%.

The two-year JGB yield fell 1 bp to 0.735%.

The five-year yield fell 2 bps to 0.96%.