TOKYO, July 28 (Reuters) - The benchmark Japanese government bond yield slipped to an eight-week trough on Tuesday on flight-to-quality spurred by a global retreat in equities, although market wariness towards driving yields too low kept the decline shallow.

The 10-year JGB yield fell half a basis point to 0.400 percent, its lowest since June 1. Profit-taking prevented the yield from dropping further, traders said.

Memories of bond rallies being followed by sharp reversals remain fresh, notably when the 10-year yield surged above 0.40 percent soon after stooping to a record low 0.195 percent in January.

Meanwhile the market smoothly absorbed a 2.5 trillion yen ($20.25 billion) two-year JGB auction. The bid-to-cover ratio, a gauge of investor demand, rose to 3.84 from 3.71 at the previous sale last month.

The two-year yield has stayed close to zero percent through much of the year as the Bank of Japan's regular debt purchasing operations have driven yields lower across the curve.

Stock markets sank globally after Shanghai stocks on Monday marked their biggest fall since 2007, deepening concerns about the Chinese economy floundering. Volatile Shanghai stocks extended losses on Tuesday and Tokyo's Nikkei dropped 1 percent.

The chill in equities and clouded global growth outlook has supported key government bonds like U.S. Treasuries and German bunds.

($1 = 123.4400 yen) (Reporting by Tokyo markets team; Editing by Simon Cameron-Moore)