JGBs skid, tracking Treasuries on Fed tapering expectations
* 10-yr JGB yield moves away from previous session's 3-month low
* Yield on 10-yr Treasuries hits two-year high in Asian trade
* Japanese investors were net sellers of foreign bonds last week - data
By Lisa Twaronite
TOKYO, Aug 22 (Reuters) - Japanese government bonds fell on Thursday, with the benchmark yield pulling away from a three-month low hit in the previous session, feeling the weight of sagging U.S. Treasuries after minutes of the Federal Reserve's July meeting suggested the U.S. central bank was poised to taper its stimulus.
The 10-year Treasury yield rose as high as 2.936 percent in Asia on Thursday, which was its highest level since July 2011.
Yields on U.S. and Japanese debt extended their rise in Asia after the Flash HSBC Purchasing Managers' Index showed activity in China's vast manufacturing sector hit a four-month high in August as new orders rebounded.
The yield on the benchmark 10-year JGB added 2 basis points to 0.750 percent, pulling away from Wednesday's low of 0.720 percent, its lowest since May 10.
Ten-year JGB futures ended down 0.19 point at 143.93, moving away from Wednesday's one-week intraday high of 144.23. Volume was a moderately light 23,489 contracts, though it was still the heaviest since Aug. 2 in thin summer conditions.
Strategists and market participants said that while rising U.S. yields would tempt yield-hungry Japanese investors, no one would rush to shed their JGBs in favour of U.S. debt.
"I think it's too early for Japanese investors to jump in the [U.S. Treasuries] market," said Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.
"They don't need to be in a hurry. Now the 20-year JGB yield is around 1.70 percent, which is high enough for Japanese life insurance companies to buy, so they don't need to take extra risk to shift their money to U.S. Treasuries with JGB yields at an acceptable level for them," she said.
The superlong sector also skidded, with the yield on the 30-year JGB adding half a basis point to 1.805 percent, while the 20-year yield rose 1.5 basis points to 1.690 percent.
Weekly capital flow data from the Ministry of Finance showed that Japanese investors turned net sellers of foreign bonds after six weeks of net buying.
"There are Japanese investors who are interested in buying Treasuries, but with the Fed getting ready to taper, they know they can buy at better levels if they wait a while," said a fixed-income fund manager at a Japanese asset management firm.
"In the meantime, investors are putting funds in JGBs, and this is providing some support to the market here," he added.
Another reason the move in JGB yields was more muted than the drop in Treasuries was the fact that the Bank of Japan's monetary policy diverges sharply from the Fed's, and is providing support to the domestic bond market. The BOJ has pledged to maintain its ultra-easy policy to help pull Japan out of deflation and stoke inflation of two percent within two years.
A Reuters survey on Thursday showed the BOJ's easy policy and government's reflationary stance are having an effect on business sentiment.
Japanese manufacturers' optimism improved to the highest level in three years, the Reuters tankan poll showed, as a weak yen boosted earnings for exporters of textiles, chemicals, steel and other metals.
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