JGB futures fall on stock rise, 30-yr auction eyed

* Treasuries slide, stock rise cuts safe-haven buying of JGBs

* Reuters Tankan headline index hits 5-year low in July

* MOF's 30-year auction seen going smoothly

By Rika Otsuka

TOKYO, July 17 (Reuters) - Japanese government bond futures fell on Thursday, moving away from a two-month high hit earlier in the week, as an overnight slide in U.S. Treasuries and a rise in equities prompted investors to shift money to stocks from government debt.

Investors also took profits after a month-long bond rally that was sparked by renewed worries about the U.S. financial sector and increasing doubts over the prospects of Federal Reserve interest rate rises this year.

But losses were limited as concerns over the Japanese economy, as well as expectations that the Bank of Japan will leave interest rates on hold at 0.5 percent for a while, kept investors cautious about selling JGBs aggressively.

The Reuters Tankan, a monthly survey of leading Japanese firms that tracks the BOJ's closely watched tankan survey, showed on Thursday that manufacturers' business sentiment hit a five-year low in July as companies felt the pinch from surging energy and raw materials costs and sluggish demand. [JP/TAN1]

"Investors do not expect JGB yields to rise sharply from current levels," said Makoto Yamashita, chief JGB strategist at Lehman Brothers in Tokyo.

The BOJ lowered its assessment of the economy in a monthly report released on Wednesday, saying it was slowing further on rising prices of energy and raw materials. [ID:nTKU003420]

The report came after the central bank left interest rates unchanged at 0.50 percent on Tuesday.

BOJ Governor Masaaki Shirakawa said this week that the central bank is at a stage where it needs to carefully watch both downside risks to the economy and upside risks to prices, reinforcing expectations that it will stand pat for some time.

September futures 2JGBv1 fell 0.23 point to 136.19, moving away from a two-month high of 136.79 hit on Tuesday.

But the lead contract was well above an 11-month trough of 132.05 hit in mid-June.

The benchmark 10-year yield JP10YTN=JBTC climbed 4 basis points to 1.605 percent, having risen from a three-month low of 1.530 percent struck on Tuesday.

Meanwhile, a rise in yields on shorter-dated notes, more sensitive to the monetary policy outlook, was smaller.

The two-year yield edged up 2 basis points to 0.765 percent JP2YTN=JBTC, staying near a two-month low of 0.745 percent struck the previous day.

The five-year yield was up 3 basis points at 1.145 percent JP5YTN=JTBC, while the 20-year yield rose 4.5 basis points to 2.230 percent JP20YTN=JBTC. The yield curve steepened as a result.

The market's focal point on Thursday is the Ministry of Finance's auction of 30-year debt.

The ministry offered 600 billion yen ($5.7 billion) of 30-year paper in a reopening of the current No.28 bond first issued in April with a coupon of 2.5 percent.

Some analysts said 30-year bonds look expensive compared with 20-year yield as the gap between the 20- and 30-year yields is now only 22 basis points.

But most participants expect the market to digest the new supply without any problem as the auction should attract fair demand from long-term investors, who focus on absolute yield levels.

The 30-year yield rose 4.5 basis points to 2.450 percent JP30YTN=JBTC.

The Nikkei share average .N225 was up 1.1 percent by midday, tracking strong gains on Wall Street on Wednesday. [.T]

Treasuries slid the previous day, dented by a jump in stocks and data showing that U.S. inflation accelerated in June to 5.0 percent year-on-year. [US/] ($1=105.20 Yen) (Editing by Michael Watson)