* Bond purchasing continues after slow buying in Apr-June
* JGB market underpinned by Thursday's smooth auction
* 10-yr yield hits 3-mth low, 20-yr yield below key 2 pct
By Kaori Kaneko
TOKYO, July 3 (Reuters) - Japanese government bonds climbed
and futures hit a three-month high on Friday as stocks dropped
after bleak U.S. jobs data dampened expectations about the pace
of economic recovery, helping demand for government debt.
Investors continued to pick up cash bonds across the board
to make up for a slow start to their buying in the first quarter
of the financial year from April to June, with investors such as
life insurers adding longer-dated bonds to their portfolios.
The benchmark 10-year yield slipped to a three-month low,
also underpinned by a smooth auction for the maturity on
Thursday despite earlier worries about an increase in the size
of the sale.
The 20-year yield briefly dipped below 2 percent for the
first time in two months. Analysts said the appetite of
investors such as life insurers for 20-year bonds tends to fall
away when the yield drops below 2 percent.
September futures rose 0.24 point to 138.44 after touching
138.55, their highest since late March.
"After stocks declined in the wake of the U.S. jobs figures,
worries over the economic outlook prevailed," said Naomi
Hasegawa, a senior fixed income strategist, at Mitsubishi UFJ
Securities.
Wall Street fell more than 2 percent on Thursday after the
jobs data but the Nikkei dropped just 0.6 percent on Friday.
Dealers said Japanese banks with ample funds thanks to the
Bank of Japan's easy monetary policy continued to invest in
shorter-maturities.
"Investors continued buying bonds after the 10-year auction
went smoothly and they alleviated worries on supply increase to
some degree," said Akitsugu Bandou, a senior economist at Okasan
Securities.
The yield on benchmark 10-year bonds fell 3.5 basis points
to 1.320 percent, the lowest in three months, flattening the
yield curve slightly.
Investors worried about the impact of rising government debt
issuance had hung back from buying earlier in the year. But they
stepped up their purchases after the 10-year yield rose to an
eight-month high of 1.560 percent in early June on a spike in
U.S. Treasury yields and gains in global stock prices.
The two-year yield slipped 2 basis points to 0.255 percent
after falling as far as 0.250 percent, its lowest since January
2006.
The five-year yield ended down 1.5 basis points at 0.675
percent, after dipping to 0.660 percent, a level last seen in
late January. A drop below that level would take it to its
lowest in nearly four years.
The 30-year yield fell 2 basis points to 2.165 percent.
The market is waiting for fresh incentives, with U.S.
financial markets closed on Friday, and participants are looking
ahead to events such as a 40-year JGB auction next week and a
series of U.S. Treasury sales.
The Treasury Department announced on Thursday it would sell
$73 billion in longer-dated debt next week. It will sell $35
billion of three-year notes, $19 billion of reopened 10-year
notes and $11 billion of indexed 30-year notes, along with $8
billion of 10-year inflation indexed notes.
(Reporting by Kaori Kaneko; Editing by Joseph Radford)
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