JGBs slip on Nikkei gains before 10-year auction

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TOKYO, Oct 2 (Reuters) Japanese government bonds slipped on Tuesday, surrendering gains from the previous day as a jump in Tokyo shares following a solid rise on Wall Street overnight prompted selling of safe-haven debt.

JGBs had pushed higher on Monday as investors put funds to work as the second half of Japan's fiscal year kicked off, taking advantage of an early market dip after the quarterly tankan survey showed resilient confidence among manufacturers.

Dealers are now girding for a 1.9 trillion yen ( billion) auction of 10-year bonds later in the session, with the coupon likely to be set at 1.7 percent for a second straight offering, analysts said.

Demand is expected to be decent as portfolios shift more cash into the market in the early part of the October-March half of the business year. But a coupon of 1.6 percent would be the lowest in 1-{ years and is seen potentially curbing investor appetite.

''A lot of money is resting in the money market and waiting to be invested, so potential demand is high,'' said Nhan Ngoc Le, a JGB strategist at ABN Amro. ''It could be a very supportive factor for the market for the next two to three weeks.'' December 10-year futures fell 0.09 point to 135.00, slipping back on the stock market gains towards a six-week low of 134.32 struck last week.

In early trade, the Nikkei share average pushed up 1.2 percent to overtake the 17,000 level for the first time in nearly two months. T] The benchmark 10-year JGB edged up half a basis point to 1.665 percent.

Five-year yields rose 1.5 basis points to 1.195 percent, while 20-year yields climbed half a basis point to 2.175 percent.

A slew of Japanese data in the past few days has showed the economy's steady expansion extending, with industrial production and household spending beating expectations even as core inflation remains stuck slightly in negative territory.

The reports have kept in place expectations that the Bank of Japan could raise overnight rates to 0.75 percent from 0.5 percent in December or early next year as the central bank is seen continuing to try to normalise monetary policy.

Investors see a roughly 50 percent chance the BOJ will raise rates in December and a 60 percent chance of a hike in January, according to swap contracts on the overnight call rate.

Reuters MP VP0730

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