JGBs track drop in Treasuries, eye 2-year auction

TOKYO, April 26 (Reuters) - Japanese government bonds edged down on Thursday, tracking losses in Treasuries the previous session on a solid rise in U.S. stocks, as market players cautiously await a two-year note auction later in the day.

The Ministry of Finance will sell 1.7 trillion yen ($14.3 billion) of two-year JGBs and the coupon is seen likely to be set at 0.9 percent, which would be the highest since last July.

Analysts said demand from Japanese banks at the start of the business year that kicked off this month should produce a solid result, though some investors may hesitate to buy before the Bank of Japan's twice-yearly economic outlook report on Friday.

"The auction should turn out to be good as not many expect the BOJ to hike rates in the next few months, and demand at the start of the business year will help," JGB analysts at Lehman Brothers said in a note to clients.

But the Lehman analysts also noted that a 0.9 percent coupon for two-year note may not be attractive to investors who believe the BOJ will raise rates above 1.0 percent in the next year or two.

The BOJ is expected to repeat its message that the economy's long expansion remains intact and core consumer inflation should slowly accelerate from near zero, laying the groundwork for future rate increases.

The BOJ also holds a one-day meeting and is widely expected to keep rates at a decade-high of 0.5 percent, while investors look for clues from Governor Toshihiko Fukui's post-meeting news conference on the policy outlook.

June 10-year futures dipped 0.07 point to 134.10 2JGBv1 in early trade.

The benchmark 10-year yield was up half a basis point to 1.650 percent JP10YTN=JBTC, staying in sight of a two-month high of 1.710 percent hit last week.

Five-year yields JP5YTN=JBTC rose 1.5 basis points to 1.230 percent. Two-year notes JP2YTN=JBTC were untraded after finishing at 0.840 percent the previous session.

Treasuries slid on Wednesday as a rise in the Dow Jones industrial average .DJI to an intraday record above 13,000 and solid business spending data tempered expectations for the Federal Reserve to cut rates to help the economy. Dealers say JGBs may remain confined to tight ranges ahead of Friday's barrage of data, which includes figures expected to show core inflation falling at a slightly faster pace but the labour market staying robust.