JGBs edge down but trim losses as stocks slip
TOKYO, Sept 5 (Reuters) - Japanese government bonds edged down in subdued trade on Wednesday after an overnight fall in Treasuries dented sentiment, but losses were limited as Tokyo shares gave up earlier gains.
Treasuries slipped on Tuesday after the Institute for Supply Management reported that U.S. manufacturing expanded in August, although at a slower pace than in July.
Analysts said the ISM data showed signs of continuing economic growth, easing concern that the credit squeeze of the past month might crimp the economy or even tip it into recession.
An early jump in Tokyo shares prompted investors to trim their bets on fading chances of a Bank of Japan interest rate rise as early as this month.
But dealers quickly bought government bonds back and squared positions as the Nikkei share average .N225 gave up all its early gains and slipped 0.07 percent by midday.
Trade was quiet as fresh data was lacking in Japan and investors awaited more U.S. economic reports this week as well as an interest rate decision by the European Central Bank on Thursday.
"The JGB market is reacting to the ISM data, but most players are not doing much as they await more data from U.S.," said Katsutoshi Inadome, a fixed income strategist at Mitsubishi UFJ Securities.
September 10-year futures 2JGBv1 fell 0.02 point to 135.28, recovering from a low of 135.14 hit earlier in the session.
The yield of new benchmark 10-year bonds auctioned the previous day JP10YTN=JBTC rose a basis point to 1.655 percent, after striking as high as 1.665 percent, the highest in three weeks.
Credit worries triggered by the U.S. subprime mortgage market meltdown set off a flight-to-safety rally in JGBs last month, helping to push the 10-year yield to 1.540 percent on Friday, which matched an 18-month low hit earlier in August.
The Federal Reserve's Beige Book of regional economic conditions due later in the session along with Friday's jobs report are expected to provide more clues on whether the U.S. central bank will cut interest rates at its policy meeting on Sept. 18, a day before a BOJ rate decision.
"The market seems increasingly convinced that the room for long-term JGB yields to rise from here is small, if the view remains unchanged that the Fed will cut rates and the BOJ will keep rates steady this month," Chotaro Morita, chief fixed income strategist for Deutsche Securities, said in his note to clients.
The five-year yield JP5YTN=JBCTC edged up a basis point to 1.175 percent, off an 11-month low of 1.080 percent hit two weeks ago.
The two-year yield JP2YTN=JBTC was unchanged at 0.850 percent, staying away from a five-month low of 0.810 percent hit in mid-August.
The 20-year yield JP20YTN=JBTC and the 30-year yield JP30TYN=JBTC edged up 1.5 basis points to 2.140 percent and 2.380 percent respectively.
The ISM factory activity index dipped to 52.9 in August from 53.8 in July but still showed a reading above 50, reflecting economic expansion.
