JGB down for 2nd day as oil slide boosts stocks

* JGBs down as oil retreat lifts shares, hurts Treasuries

* Activity subdued before 20-year auction

* Investors seen buying on dips, limiting any 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 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 inflation that has pushed the annual rise in core consumer prices to a decade high.

Market players 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.

JGB strategists at Barclays Capital said a further drop in oil prices will be key for the bond market outlook.

"If oil prices do in fact undergo a full-scale adjustment, this would likely exert a negative impact on bonds over the near term by supporting economic growth and share prices," they said in a note to clients.

But the Barclays strategists also said that more investors should emerge as JGB buyers when five-year yields approach 1.20 percent and 10-year yields near 1.65 percent.

September 10-year futures 2JGBv1 fell 0.32 point to 135.38 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 it 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 3 basis points to 1.640 percent, up from a three-month low of 1.530 percent struck last week.

The two-year yield JP2YTN=JBTC edged up 1.5 basis points to 0.795 percent, while the five-year yield JP5YTN=JBTC climbed 3.5 basis points to 1.200 percent.

In the stock market, the Nikkei average .N225 was up 1.1 percent on the back of gains in Wall Street shares and stronger exporter shares. Falling oil prices hit safe-haven Treasuries the previous day, with the U.S. 10-year yield hitting to a one-month high. [US/] ($1=107.29 Yen) (Editing by Michael Watson)