JGBs edge down ahead of five-year auction

* JGBs inch down ahead of five-year auction on Tuesday

* Bonds top heavy after recent yield decline

* Trading thin after U.S. markets closed on Friday

* Nikkei's losing run provides downside support

By Shinichi Saoshiro

TOKYO, July 7 (Reuters) - Japanese government bonds edged down on Monday, succumbing to selling as dealers made room on their books for a 1.9 trillion yen ($17.8 billion) auction of five-year debt the next day.

Losses were limited as the Nikkei stock average .N225 dipped 0.1 percent and was on track for a 13th consecutive day of losses, extending its longest losing streak in half a century on mounting investor worries about the global economy's health.

Activity was quiet and volumes were low as the market lacked trading incentives after U.S. markets were closed on Friday for the Independence Day holiday.

"JGBs are increasingly becoming top heavy following the recent sharp decline in yields," said Hidenori Suezawa, chief fixed-income strategist at Daiwa Securities SMBC.

September 10-year futures 2JGBv1 fell 0.20 point to 134.98, pulling back from a high of 135.34 reached on the early losses ins stocks.

The benchmark 10-year yield JP10YTN=JBTC rose 2 basis points to 1.660 percent after initially dipping to 1.635 percent, holding off a seven-week low of 1.585 percent hit last week.

Over the past three weeks 10-year yields are still down 22 basis points from the peak hit in mid-June as investors have started to doubt how soon the Bank of Japan could lift interest rates.

On Friday, the 10-year yield fell as low as 1.615 percent after a slew of key events the previous day -- a 10-year JGB tender, a European Central Bank policy meeting and the U.S. employment data -- failed to produce any jarring surprises.

The JGB market was particularly relieved as the ECB, after hiking interest rates to 4.25 percent as expected, did not signal further monetary policy tightening ahead.

Further relief came after the U.S. payrolls data showed companies cutting 62,000 jobs in June, close to expectations and suggesting the economy is still suffering from the housing market slide and credit crunch.

The figures helped cool speculation about how quickly the Federal Reserve could consider lifting rates.

With the previous week's big events out of the way, however, attention turned to more domestic concerns, such as Tuesday's five-year debt auction.

"The auction results may not be very good, as the coupon on the new issue will be significantly lower from the previous issue's 1.5 percent coupon," said Suezawa at Daiwa Securities SMBC.

Considering current yield levels, investors are bracing for either a 1.2 or 1.3 percent coupon for the new five-year issue.

The five-year yield JP5YTN=JBTC rose 2 basis points to 1.250 percent. Market participants said further selling could emerge in the mid-term sector to ensure the highest possible coupon for the new issue.

But even if the auction outcome is lacklustre, a significant market decline is unlikely as investors are expected to gradually pick up the five-years in the secondary market given the equity market weakness, Suezawa said. ($1=106.79 yen)