JGB fall for 2nd day as oil slide boosts stocks

* JGBs down as oil retreat lifts shares, hurts Treasuries

* Activity subdued before 20-year auction, trade and CPI data

* Investors seen buying on dips, limiting yield rise

By Eric Burroughs

TOKYO, July 23 (Reuters) - Japanese government bonds retreated for a second straight day on Wednesday as a slide in oil prices from record peaks gave a lift to Tokyo shares and took some of the sting out of disappointing U.S. corporate earnings.

Losses were limited as investors have been taking advantage of a jump in benchmark yields from three-month lows struck last week to allocate funds to the market, believing the Bank of Japan is a long way from considering raising interest rates.

The Japanese government sharply downgraded its economic growth forecast for the current business year to 1.3 percent from 2.0 percent, citing rising energy and commodity costs, a U.S. slowdown and a stronger yen. [ID:nT299973]

While not a surprise, the report highlighted why the BOJ has felt that risks to growth are more of a threat than the pick-up in core inflation to a decade high.

"On the BOJ, no one thinks there's going to be any action soon," said Joseph Kraft, head of Japan capital markets at Dresdner Kleinwort.

Swap contracts on the overnight call rate are pricing in only a roughly 50-50 chance of a quarter-point hike before the fiscal year ends in March JPONIBOJ=TRDT.

Investors are now awaiting an 800 billion yen ($7.5 billion) auction of 20-year bonds on Thursday, along with data on trade and consumer prices later this week for clues on how the economy is coping.

Analysts expect solid demand at the auction after a smooth sale of 30-year paper last week and as the steepening of the yield curve has enticed institutional investors to pick up super-long bonds.

But Kraft said there could be some turbulence around the offering as many bond dealers have much less capacity to hold paper on their books, potentially leading to selling if buyers fail to show up as expected.

September 10-year futures 2JGBv1 fell 0.17 point to 135.53 and hit a low of 135.30, a day after sliding nearly a full point for the biggest one-day drop in five weeks.

On Tuesday a systems glitch on the Tokyo Stock Exchange limited trade in JGB futures to just 1-½ hours compared with the usual 4-½ hours, but the outage did not have a big impact because investors were not active after returning from a long holiday weekend.

The benchmark 10-year yield JP10YTN=JBTC rose 2 basis points to 1.630 percent but edged off an early peak of 1.650 percent.

JGB strategists at Barclays Capital said a further drop in oil prices would hurt bonds in the near term by stirring hopes on the economic and stock market outlook.

But Barclays also said more investors should emerge to pick up bonds when five-year yields approach 1.20 percent and 10-year yields near 1.65 percent.

The two-year yield JP2YTN=JBTC edged up 1.5 basis points to 0.795 percent, while the five-year yield JP5YTN=JBTC climbed 2 basis points to 1.185 percent.

Ahead of Thursday's sale, the 20-year yield JP20YTN=JBTC rose 2 basis points to 2.255 percent. The yield curve between five- and 20-year yields was steady at 107 basis points, holding near its steepest levels in three months.

Falling oil prices and more inflation-fighting talk from Federal Reserve officials hit Treasuries the previous day, with the U.S. 10-year yield hitting to a one-month high. [US/]

Philadelphia Fed President Charles Plosser warned that rising inflation could force the Fed to lift rates even before labour and financial markets recover. [ID:nN22196417]

Highlighting the pressure policymakers are feeling about dealing with inflation, the Fed said on Tuesday that two regional banks dissented in favour of a discount rate increase at its last meeting. ($1=107.29 Yen) (Editing by Michael Watson)