JGBs tumble as Treasury drop hits supply-wary mkt

* Futures drop over one point to 6-½ month low
* Midterm JGBs underperform on heavy selling by banks
* 5-yr/20-yr yield spread tightens, curve could bear flatten

By Shinichi Saoshiro and Chikafumi Hodo
TOKYO, Dec 8 (Reuters) - Japanese government bonds tumbled on Wednesday, with futures falling a full point as a big slide in U.S. Treasuries hit a market bruised after a weak 30-year auction and wary ahead a five-year sale.
The sharp drop in Treasuries, after a proposed extension of tax cuts boosted economic optimism while stirring concerns over inflation and the massive debt burden in the United States, hit a JGB market short on confidence after the previous day's tepid 30-year offering.

The decline in Treasuries sparked a sell-off of midterm JGBs by domestic banks, recently seen selling longer-dated debt to help offset losses from foreign bond holdings.
"The United States is now being associated with a debt burden as well, while gains in stocks diminish hopes for extra monetary easing. Government debt does not look good under such conditions and investors are dumping it," said a fund manager at a domestic asset management firm.
Fading prospects for further Bank of Japan easing could reverse the recent steepening of the yield curve by initiating a bear flattening phase, analysts said.

Bear flattening occurs when shorter dated debt yields rise faster than those on longer dated debt.
The five-year/20-year yield spread tightened by 4 basis points to 159 basis points, pulling away from Tuesday's 6-½ month peak of 163 basis points.

December 10-year futures 2JGBv1 fell 1.11 point to 140.10 after going as low as 140.07, a 6-½ month trough.
Sellers of futures included foreign funds buying stock futures at the same time, momentum following funds and dealers selling to hedge for the five-year auction on Thursday, traders said.
"Domestic institutional investors, who were looking for bargain-hunting opportunities, are taking a wait-and-see stance as falls in JGB prices were a bit too rapid," said Masaru Hamasaki, a senior strategist at Toyota Asset Management.

"Today's rapid selling in JGBs is a bit overdone. But at the same time, there are very few buyers now."
Japan's Ministry of Finance will sell 20-year debt next week in addition to the five-year offering on Thursday.