* 10-year sector dips slightly after auction
* 30-year bonds retain strength after weak U.S. data
* Expectations of more bond buying by BOJ supports market
By Hideyuki Sano
TOKYO, April 2 (Reuters) - Japanese government bond prices dropped on Tuesday following some disappointment on the result of a 10-year JGB auction, though expectations of more aggressive bond buying by the Bank of Japan underpinned the market.
Longer maturities fared better, with the 30-year bond yield briefly matching a near-decade low hit last week, as soft U.S. manufacturing data hurt share prices -- to the benefit of low-risk low-return bonds.
The yield on the current 10-year JGBs rose 0.5 basis point to 0.565 percent, pulling further away from near-decade low of 0.510 percent hit last week. The 10-year JGB futures shed 0.10 point to 145.36.
“There was a bit of adjustment after a weak auction result,” said Le Ngoc Nhan, strategist at Morgan Stanley MUFG Securities.
But superlong bonds, such as 20- and 30-year bonds, outperformed as investors snatched up these maturities as yields on shorter paper have fallen to painfully low levels.
The 30-year bond yield fell 4.0 basis points to 1.510 percent, at one point matching near 10-year low of 1.505 percent hit on Friday. The 20-year yield also fell 3.5 basis point to 1.385 percent.
“The adjustment in Japanese share prices spurred buying in JGBs. I suspect European shares will also fall after the long weekend. It’s difficult to short JGBs now,” said a fund manager at a Japanese asset management firm.
Japan’s Nikkei stock average dropped to a three-week low after the weak Institute for Supply Management data suggested the U.S. economy was losing some momentum at the end of the first quarter as the effects of a tighter fiscal policy kicked in.
In addition, expectations that Bank of Japan’s new Governor Haruhiko Kuroda will adopt an unprecedented level of monetary easing helped to support the market ahead of his first policy meeting over April 3-4.
Many market players expect the Bank of Japan to increase its bond buying and extend the maturity of its bond buying, though there is no clear consensus as to exactly what the central bank will do.
“Until we see more clarity on the BOJ’s stance on money market operations and how it will try to bring down the whole yield curve, the market is likely to be volatile,” said Morgan Stanley’s Nhan.
Some market players see risk of a setback in JGBs after the market has rallied for weeks on hopes of more bond buying by the Bank of Japan. The 10-year yield fell 23 basis points last quarter, its biggest fall in nearly three years.
“People will think the market will be running out of supportive factors after the BOJ meeting,” said Tohru Yamamoto, chief bond strategist at Daiwa Securities.
But others say an increase in the BOJ’s buying will tighten an already strong demand for fixed income from Japanese investors.
“I think the 10-year yield will fall below the record low of 0.430 percent,” said the Japanese fund manager. “We know pushing yields too low is risky. But we also need to follow the market,” he added.