JGB yields fall with peers after smooth 10-year auction

Oct 4 (Reuters) - Japanese government bond yields fell across the board on Tuesday, tracking Treasury and gilt yields that dropped overnight on weaker-than-expected U.S. manufacturing data and the British government's U-turn on a controversial tax cut.

Most JGB notes went untraded in the morning, but the benchmark 10-year yield JP10YTN=JBTC later fell 1.5 basis points to 0.225%, its lowest since Sept. 22.

Katsutoshi Inadome, a senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, said demand was stoked by a successful auction for 10-year bonds, sending futures higher in the afternoon. Benchmark 10-year JGB futures 2JGBv1 were last up 0.47 point at 149.03.

The 2-year JGB yield JP2YTN=JBTC fell by half a basis point and hit a near three-month low of -0.065%, and the 5-year yield JP5YTN=JBTC dropped 1.5 basis points to reach a three-week low of 0.035%.

The 20-year yield JP20YTN=JBTC was at 0.945%, its lowest since Sept. 22, after dropping two basis points.

Yields on longer-term notes also fell. The 30-year JGB yield JP30YTN=JBTC fell half a basis point to 1.315% and the 40-year JGB yield JP40YTN=JBTC fell 1.5 basis points to 1.490%.

In a research note published overnight, Nomura Securities strategy analyst Naka Matsuzawa predicted that the Bank of Japan (BOJ) would likely loosen its yield curve control (YCC) policy next July, enabling 10-year yields to reach 0.4% or 0.5%.

The BOJ's YCC policy keeps the 10-year yield below 0.25% in order to limit borrowing costs.

"In January-March 2023, the Fed's suspension of rate hikes will likely ease pressures pushing up yields and weakening JPY," Matsuzawa wrote.

"But when concerns about a global economic downturn subside and risk-off flows halt, the BOJ will likely begin the process of revising its policy framework, given the mechanisms pushing up prices and wages in Japan and the BOJ's interest in reinforcing the staying power of YCC."

Reporting by Sam Byford and Tokyo markets team; Editing by Subhranshu Sahu

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