JGBs slip in line with Treasuries, but domestic demand underpins prices
* 10-year yield rises but stays in recent trading range * This week's BOJ meeting eyed; no policy changes expected By Lisa Twaronite TOKYO, July 8 (Reuters) - Benchmark Japanese government bond prices fell on Monday, tracking U.S. Treasury yields after U.S. jobs data on Friday suggested the Federal Reserve will begin to taper its bond-buying stimulus. Domestic demand limited losses, as did the Bank of Japan's regular asset-buying operations. On Monday, the central bank offered to buy outright 100 billion yen ($991.03 million) of one- to three-year JGBs; 400 billion yen of three- to five-year JGBs; and 500 billion yen of five- to 10-year JGBs. "Domestic investors are interested in buying on dips for JGBs, probably 0.9 percent for the 10-year, and around the middle of 0.3 for the 5-year, because of the differences in economic conditions between the U.S. and Japan and the differences in monetary policies," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. "We think the impact of high U.S. yields will remain limited for the JGBs," she said. The 10-year yield added 2.5 basis points to 0.880 percent, still in the 0.80 to 0.90 percent trading range where it has held for the past five weeks. The 30-day JGB futures implied volatility has been falling, hitting a two-month low on Friday of 3.74, from a two-year high of 6.1 on April 12. Ten-year JGB futures ended down 0.33 point at 142.22 after earlier falling to a one and a half week low of 142.12. Volume was a relatively thin 23,290 contracts, though up from Friday's two-month low of 18,443 contracts. The JGB yield curve slightly steepened as the superlong tenor underperformed, with the 30-year yield rising 3 basis points to 1.885 percent. The 20-year yield also increased 3 basis points to 1.760 percent. "As long as the BOJ continues buying, Japanese yields will take directional cues from U.S. yields but won't test new highs as Treasuries did," said a fixed-income fund manager at a Japanese asset management firm. The BOJ is widely expected to maintain its ultra-easy monetary stance at its regular two-day policy meeting beginning on Wednesday. It could revise up its assessment of the economy to suggest that the world's third largest economy is recovering, thanks in part to the government's reflationary policies. BOJ data released on Monday showed Japanese bank lending had its biggest annual increase in four years in June, suggesting the central bank's aggressive monetary stimulus is nudging companies to make new investments. By contrast, the U.S. Federal Reserve is seen as likely to begin to reduce its asset-buying stimulus. On Friday, the key nonfarm payrolls report for June showed U.S. employers added 195,000 new jobs to their payrolls, beating expectations of 165,000. That led to a sharp selloff in Treasuries on Friday, with the 10-year yield suffering its biggest one-day rise in nearly two years to the highest since August 2011.
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