JGBs inch lower, await 20-year bond auction

TOKYO, Oct 25 (Reuters) - Japanese government bonds inched lower on Thursday as gains in domestic equities and caution ahead of a 20-year bond auction offset the impact of a flight-to-safety rally in U.S. Treasuries overnight.

U.S. Treasuries rallied on Wednesday as weak housing data and initial stock losses unleashed safe-haven demand and reinforced the view that the Federal Reserve will cut the federal funds rate further to forestall a housing-led slowdown.

Investors flocked to bonds from stocks after Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) reported a quarterly loss and a huge $7.9 billion write-down on bad leveraged loans and mortgage bets.

U.S. bond prices ended up trimming some gains on Wednesday, as stocks pared losses on speculation that the Fed would lower the discount rate ahead of next week's two-day policy meeting.

"People thought the Nikkei average would be a bit weaker and there is also the 20-year bond auction today," said Akitsugu Bandou, a senior strategist at Okasan Securities.

"If the auction goes well, we could see some buybacks in futures in the afternoon," Bandou said.

JGB 10-year futures dipped 0.05 point to 136.11 2JGBv1 and pulled away from a one-month high of 136.24 struck in Wednesday's regular trading session. In Wednesday's evening session, futures extended gains to rise as high as 136.27.

But futures still held near a key threshold of 136.41. A rise above that level in regular session trading would be a 20-month high, the highest since February 2006.

The 10-year JGB yield rose 0.5 basis point to 1.570 percent <JP10YTN=JBTC>.