JGBs slip as US data hurts Treasuries, lifts stocks

TOKYO Oct 30 (Reuters) - Japanese government bonds fell on Friday after U.S. Treasuries dropped and stock markets gained on data showing that the U.S. economy grew in the third quarter for the first time in more than a year.

* Bond market players were awaiting the outcome of the Bank of Japan's monetary policy meeting on Friday and its twice-yearly economic outlook report, in particular whether the central bank forecasts deflation to continue through March 2012. [ID:nT32693]

* U.S. Treasuries fell and Wall Street rose on Thursday after data showed U.S. GDP grew at a faster-than-expected annual rate of 3.5 percent in the third quarter, unofficially ending a recession. [US/] [ID:nLT403984]

* December 10-year JGB futures 2JGBv1 were down 0.10 point at 137.90 after falling as low 137.75.

* "It was a straightforward reaction by JGBs to higher stocks, lower Treasuries and a weaker yen," said Makoto Yamashita, chief Japan interest rate strategist at Deutsche Securities. "Investors who had bought short to midterm bonds in response to yesterday's stock market fall and yen strength are being forced to tweak their positions."

* The five-year yield JP5YTN=JBTC rose 0.5 basis point to 0.675 percent. The benchmark 10-year yield JP10YTN=JBTC also climbed 0.5 basis point, to 1.410 percent after hitting a fresh 2-½ month high of 1.425 percent.

* The 20-yield rose 1 basis point to 2.145 percent JP20YTN=JBTC and the 30-year yield was flat at 2.285 percent JP30YTN=JBTC.

* Superlong JGBs saw some support from index players looking to extend durations for the month-end and from yield curve players selling shorter-dated paper and buying longer maturities, market participants said.

* The market widely expects the BOJ to exit its commercial paper and corporate bond buying operations at the end of the year as scheduled. The operations were introduced last year to help corporate finance but have recently not been used as credit risk fears have receded.

* Of slightly more interest was whether the BOJ board would discuss extending beyond December its programme offering low-interest loans to corporations backed by corporate debt as collateral. These operations, intended to run through the remainder of the year, have proved to be more popular than its CP and corporate bond buying programme.

* Analysts have said an end to the BOJ's programmes to aid corporate financing would probably have limited impact as such a move would unlikely be associated with an exit from its super easy monetary policy.

* As for the BOJ's outlook report, bond market players are focusing on whether the central bank will forecast deflation stretching to March 2012, as it is seen sticking to a low interest rate policy while deflation remains.

* The annual drop in Japan's core consumer price index slowed to 2.3 percent in September from 2.4 percent in August, data showed on Friday. But the year-on-year fall in the so-called core-core inflation index, which does not include prices of food and energy, accelerated to 1.0 percent from 0.9 percent in August. [ID:nT128155]

* Tokyo's Nikkei average .N225 gained 1.3 percent on the upbeat U.S. economic data, after slipping below the 10,000 threshold for the first time in three weeks on Thursday. [.T] (Reporting by Shinichi Saoshiro; Editing by Chris Gallagher)