JGBs slip, focus on 10-year bond auction

* JGBs slip on hedge-selling before 10-year auction

* Demand for new 10-year bonds could be tepid

* But JGBs seen supported due to economy's weakness

By Masayuki Kitano

TOKYO, Aug 5 (Reuters) - Japanese government bonds edged lower on Tuesday and 10-year yields pulled up from the previous day's four-month lows after a dip in U.S. Treasuries, as traders braced for a key bond auction later in the day.

But losses were limited, with JGBs supported by mounting concern that the domestic economy may have entered a downturn, market players said.

While JGBs could be held back in the near term due to caution before policy meetings by the U.S. Federal Reserve and the European Central Bank, sharp sell-offs seem unlikely, said Tetsuya Miura, bond strategist for Shinko Securities.

"Japan's economy is weak, so while such factors might temper falls in JGB yields, they probably will not be enough to trigger a change in the market's trend," Miura said.

September 10-year JGB futures fell 0.16 point to 136.85 2JGBv1, pulling away from a four-month high of 137.03 hit in evening session trading on Monday.

The benchmark 10-year JGB yield rose 2 basis points to 1.515 percent JP10YTN=JBTC, having risen off a four-month low of 1.495 percent hit on Monday.

U.S. Treasuries dipped on Monday, due partly to data showing that consumer prices jumped at the sharpest rate in more than a quarter century during June. [US/]

An inflation gauge tied to consumer spending showed that prices rose 4.1 percent in the year to June, marking the biggest annual gain since May 1991. [ID:nN04423003]

The Fed is widely expected to keep interest rates steady at 2 percent on Tuesday as it grapples with a faltering economy, a shaky financial system and higher prices. [ID:nN04470207]

Given the rise in consumer prices, the Fed's post-meeting statement is unlikely to be all that positive for the bond market, analysts said.

"It (the Fed) probably will not let down its guard against inflation," said Shinji Ebihara, a quantitative analyst for Mizuho Securities.

After the Fed's meeting, investors will turn their attention to the ECB's policy meeting on Thursday.

The Finance Ministry was auctioning 1.9 trillion yen ($17.6 billion) in 10-year JGBs with a coupon of 1.5 percent, down from 1.7 percent at the previous 10-year auction in July.

With yields stuck near four-month lows, analysts said 10-year JGBs were looking a bit pricey. "I think there is a lot of caution towards the auction at current levels," said Katsutoshi Inadome, fixed income strategist at Mitsubishi UFJ Securities.

Ten-year JGBs did not seem particularly cheap against the medium-term sector or against interest rate swaps, he added.

But JGBs are likely to stay on a solid footing even if the 10-year auction results turn out to be weak, analysts said.

This is partly because investors are likely to look for opportunities to buy bonds to pick up income gains ahead of the end of September, when the first half of the current business year ends, Inadome said. (Editing by Hugh Lawson)