JGBs rise as euro zone fiscal woes curb risk appetite

* JGBs rise as risk aversion hits stocks, lifts yen

* 10-year yield pulls back from 3-month high hit previous day

* Gains lose steam as caution sets in before U.S. jobs data

* Futures capped by options-linked selling

By Shinichi Saoshiro

TOKYO, Feb 5 (Reuters) - Japanese government bonds rose on Friday, with the benchmark 10-year yield slipping from a three-month high as fears about the euro zone's worsening fiscal problems hit stocks, boosted U.S. Treasuries and hurled the yen higher.

Government debt such as JGBs and U.S. Treasuries have climbed as widening fiscal concerns over debt-laden euro zone members like Greece, Portugal and Spain have curbed risk appetite as investors sell off stocks in these countries. [ID:nLDE6130RE]

But JGB gains were capped as investors awaited a key U.S. jobs report that is expected to shed further light on the health of the world's biggest economy.

"The euro zone's fiscal problems gave JGBs an early lift, but their immediate impact is lessening as the market gears up for the U.S. jobs numbers," said Shinji Nomura, chief fixed-income strategist at Nikko Cordial Securities.

March JGB futures 2JGBv1 jumped as high as 139.29 in early trade before trimming gains to 138.93, up 0.13 point on the day.

Futures were also weighed down by investors trying to hedge against potential obligations created through bond options, market players said.

Earlier in the year these investors sold options on 10-year bonds allowing the buyer of the option to sell at a yield of 1.35 percent, considered a tough level to crack.

But the 10-year yield rose above that level for the first time in three weeks on Wednesday, prompting sellers of the bond option puts to sell futures, they said.

The benchmark 10-year yield dipped 0.5 basis point to 1.370 percent JP10YTN=JBTC, off a three-month high of 1.380 percent brushed the previous day. It slid as low as 1.350 percent earlier on Friday.

The 10-year yield has been trapped in a narrow range of 1.300 percent and 1.380 percent so far this year.

While JGBs are being supported by expectations the Bank of Japan could further ease monetary policy to combat deflation, concerns the government may need to boost debt issuance to make up for a tax revenue shortfall are preventing investors from chasing prices higher.

"Having no fresh domestic factor to aggressively buy or sell JGBs now, players are looking for factors elsewhere," said Koichi Ono, a senior strategist at Daiwa Securities Capital Markets.

"One focal point in the JGB market is whether today's U.S. jobs data would turn investors more positive about the U.S. economy or not," Ono said.

Surprisingly solid jobs figures would likely help shift the upper end of the 10-year yield's near-term range to just below 1.45 percent, he said.

The median economists' forecast for U.S. non-farm payrolls data on Friday is for 5,000 jobs to have been added to the economy in January after an unexpected loss of 85,000 in December. [ECI/US]

While an upbeat result is expected to hurt government debt, market players said some investors may take the opportunity to scoop up JGBs at higher yield levels.

The two-year yield edged up 0.5 basis point to 0.160 percent JP2YTN=JBTC, while the 20-year yield was down 1.5 basis points at 2.150 percent JP30YTN=JBTC as life insurance companies bought longer-dated bonds.

The yield curve flattened as a result.

Risk aversion hit stock markets and supported currencies perceived as safe havens, such as the dollar and yen.

A stronger yen is considered JGB-friendly as it could fan deflation by reducing prices of imported goods.

Tokyo's Nikkei stock average .N225 slid nearly 3 percent to post a two-month closing low near the psychologically important 10,000 level. [.N]

The yen hovered close to a seven-week high against the dollar JPY= and a one-year peak versus the euro EURJPY=R reached the previous day. [FRX/] (Additional reporting by Rika Otsuka; Editing by Chris Gallagher)