By Lisa Twaronite
TOKYO, Aug 2 (Reuters) - Japanese government bonds took their cue from sagging U.S. debt prices on Friday, with the benchmark JGB yield touching a 2-1/2-week high as investors positioned for U.S. employment data later in the session.
U.S. Treasuries prices fell on Thursday, pushing benchmark yields close to two-year highs as encouraging readings on jobs and factory activity supported the view the U.S. Federal Reserve will taper its bond purchases sooner rather than later.
'The rise in JGB yields was small by comparison (to U.S. Treasury yields), as this year's 10-year auction showed that there is still healthy demand, and many investors are hesitant to take big positions head of the U.S. jobs report,' said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
'Also, it's the summer vacation season, and a lot of the foreign investors who might be expected to sell JGBs are absent from the market,' she added.
Later on Friday, the key U.S. nonfarm payrolls report for July is expected to see a rise in hiring of 184,000, while the unemployment rate likely dipped to 7.5 percent last month from 7.6 percent.
An upside surprise could prompt the U.S. central bank to begin reducing the $85 billion of assets it buys each month, perhaps as early as its September 17-18 meeting. That would put upward pressure on Treasury yields which would in turn weigh on JGB prices.
Bank of Japan operations also provided some support for JGBs on Friday. In regular operations under its massive easing scheme, the BOJ offered to buy outright 450 billion yen ($4.54 billion) of JGBs with residual maturity of five to 10 years, and another 110 billion yen of JGBs with up to one year left to maturity.
'BOJ operations are propping up supply and demand conditions, but there is a feeling that many investors are waiting for the next big trading factor before they step in to buy,' said a fixed-income fund manager at a European asset management firm in Tokyo.
The 10-year JGB yield rose 2 basis points to 0.810 percent after earlier touching 0.825 percent, its highest since July 17.
The benchmark yield dropped as low as 0.770 percent last week, which was its lowest since May 14 and led some investors to believe the market might be overheating.
'Everyone expects the market to sell off and get to between 0.850 percent and 0.950 percent, and then they want to buy,' said a fixed-income strategist at a large Japanese brokerage.
'Either they're hoping for a sell-off to buy, or they're hoping for a sell-off because they're positioned for one. But normally when everyone starts to expect something, it doesn't happen,' he added.
The 10-year JGB futures contract ended down 0.39 point at 143.22 after dropping as low as 143.18, its lowest since July 17. Volume of 27,542 was relatively low, but was the highest since July 11 amid thin summer market conditions.
The 30-day implied volatilities on JGB futures rose to 2.80 as of Thursday, up from a more than two-month low of 2.64 on July 26. The latest data will be available later on Friday. Still, it remained well short of its two-year high of 6.1 hit on April 12.
The 5-year yield rose 2 basis points to 0.305 percent after rising as high as 0.315 percent, its highest since July 10.
The superlong tenor also lost ground, with 30-year yield adding one basis point to 1.820 percent after earlier rising to a one-week high of 1.830 percent, moving away from a 6-week low of 1.800 percent touched on Wednesday. The 20-year yield rose one basis point to 1.710 percent after earlier hitting a one-week high of 1.720 percent, moving away from Wednesday's nearly 5-week low of 1.695 percent.
The yield curve flattened, with the 10-year yield's spread to 20-year yields shrinking to 90 basis points from a four-month high of 94.5 basis points hit on July 24. The 10-year yield spread to 30-year debt shrank to 101 basis points from a four-month high of 108 basis points on July 24.
Concerns that a planned national sales tax increase might be delayed or watered down would weigh on JGB market sentiment, although Prime Minister Shinzo Abe appeared on course to implement it as planned.
The head of the International Monetary Fund, Christine Lagarde, expressed confidence on Thursday that the government would stick to its reforms, and said the fund has always been supportive of an increase in Japan's sales tax.
Economists polled by Reuters said the Japanese economy could withstand a planned sales tax increase even if growth slows from the first quarter's healthy pace, with 14 of the 15 respondents saying the government should go ahead as planned with the first stage of raising the 5 percent tax to 8 percent in April.
($1 = 99.2250 Japanese yen)
(Reporting by Lisa Twaronite; Editing by Jacqueline Wong) Keywords: MARKETS JAPAN JGB/
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