JGBs fall as investors wary before 10-yr sale, Fed

* JGBs fall on investor caution before 10-year auction

* Investors also awaiting Fed's rate decision

* Market trims some losses as Nikkei slides

* Global growth concerns continue to lend support to JGBs

By Chikako Mogi

TOKYO, Aug 4 (Reuters) - Japanese government bonds fell on Monday, pulling the benchmark 10-year yield away from three-month lows, as investors grew wary of buying ahead of a key auction the next day.

Market players were also reluctant to take big positions before the Federal Reserve's policy decision due on Tuesday and a post-meeting statement.

Investors are taking a wait-and-see stance until key events are out of the way, because they are not in a hurry to buy now when JGB yields are likely to fall on growing concerns about Japanese, U.S. and euro zone growth, traders said.

"The 10-year zone is weak but shorter maturities are firm, so prices are clearly falling on hedging against the 10-year JGB auction," said Kenro Kawano, a senior interest-rate strategist at Credit Suisse.

The JGB market trimmed some losses as the Nikkei share average .N225 fell 1 percent.

September 10-year JGB futures fell 0.13 point to 136.59 2JGBv1, off the day's low of 136.46. Futures matched a three-month high of 136.86 set in the evening session on Friday.

Volume remained thin at 16,345 lots.

The 10-year JGB yield underperformed the rest of the curve, rising as high as 1.540 percent before easing to 1.535 percent JP10YTN=JBTC, up 2.5 basis points on the day. The yield fell to a three-month low of 1.505 percent on Friday.

The two-year yield outperformed, with the yield JP2YTN=JBTC easing 1 basis point to 0.750 percent.

"Prices are already at the higher end of recent ranges and investors have no reason to buy now before the 10-year JGB auction and the Fed meeting," said a dealer at a Japanese bank.

"Investors don't want to push 10-year yields below 1.5 percent before the auction, as yields are expected to gradually inch lower given the bleak growth outlook for the Japanese, U.S. and euro zone economies," he said.

The Ministry of Finance plans to offer 1.9 trillion yen ($17.67 billion) in 10-year JGBs on Tuesday. At current levels, the coupon could be set at 1.5 percent, down from a 1.7 percent coupon for last month's auction of the maturity, but traders expect the auction to draw decent demand.

Also on Tuesday, the MOF meets JGB investors to discuss issuance plans, following a similar meeting on Friday with primary dealers. A ministry source told Reuters on Friday that the MOF will weigh market requests for a cut in the issuance of 15-year floating rate JGBs this fiscal year. [ID:nTKF003275]

Traders said there was resistance to pushing 10-year yields steadily lower as the yields below 1.5 percent could only be justified by expectations for the Bank of Japan to cut rates.

The BOJ is expected to keep interest rates steady through 2008, putting more focus on downside risks to growth than rising inflation. Economists polled by Reuters said Japan's economy probably shrank 0.6 percent in the second quarter, ending three straight quarters of expansion, and warned of a gloomy outlook as soaring energy costs and a global slowdown bite. [ID:nT205687]

The Fed is also expected to keep interest rates steady at 2 percent at its meeting on Tuesday.

U.S. interest rate futures suggested traders do not fully anticipate the Fed will raise the benchmark federal funds target rate, currently at 2 percent, until at least December.

U.S. Treasuries rose slightly on Friday after the July jobs report showed a labour market contraction for a seventh straight month, although the 51,000 loss in jobs was smaller than forecast. The unemployment rate hit a four-year high. [ID:nN01429062]

The national manufacturing activity index from the Institute for Supply Management showed a headline figure of 50 in July, suggesting the economy was stalling.

($1=107.51 Yen) (Editing by Michael Watson)