* 10-yr yield at 8-week low; 10-yr futures touch 8-week high
* Yield curve steepens as superlong tenor dips on supply concern
* Buy straddle options on JGB futures as volatility is low-strategist
By Lisa Twaronite
TOKYO, Oct 2 (Reuters) - Benchmark Japanese government bonds were slightly firmer on Tuesday, with the 10-year yield falling to its lowest in eight weeks as worries about a slowdown in global growth persisted.
But the yield curve steepened as the superlong tenor underperformed on supply concerns ahead of a 10-year auction on Thursday.
Economic data on Monday showed that U.S. manufacturing unexpectedly grew last month for the first time since May but euro zone factories suffered their worst quarter since early 2009, keeping alive fears of a global economic slowdown.
"Trading is getting off to a slow start this week because it's the first week of the new quarter, but the direction of yields is clear, as doubts remain about the strength of the world economy," said a fixed-income fund manager at a Japanese asset management firm.
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The Ministry of Finance conducted a regular re-offer auction to enhance liquidity on Tuesday, selling 298.7 billion yen ($3.8 billion) of 20- and 30-year debt with a yield spread at the lowest accepted price of 0.003 percent.
On Thursday, it will conduct its monthly auction of 10-year notes. Many market participants fear that the coupon for that sale will be set below the 0.8 percent at which it was set for the past three sales, if present low yields continue.
The 10-year yield fell half a basis point to 0.755 percent, its lowest level since Aug. 7.
Ten-year JGB futures inched up 0.02 point to end at 144.29, after rising to an eight-week high of 144.32.
But yields on both 20-year and 30-year
debt crept up half a basis point each, to 1.645 percent and 1.895 percent, respectively.
The relatively small yield moves in recent sessions have pushed JGB market volatility to extremely low levels.
The at-the-money implied volatility of JGB futures options is now around 1.5 percent, below July's lows around 1.7 percent, and current levels are the lowest since May 2003, said Credit Suisse strategist Shinji Ebihara in Tokyo.
Ebihara recommends buying straddles on JGB futures options, as implied volatility is unlikely to stay at these historical lows over the one-month period until the option maturity date. A straddle is a bet that an underlying asset will move.
"There's the 10-year auction, then a Bank of Japan meeting on Friday, a European Central Bank meeting, as well as U.S. employment data. There is a chance that yields will move because of any of these events, and volatility won't remain at such low levels," Ebihara said.
The BOJ is expected to keep monetary policy unchanged on Friday. At an Oct. 30 meeting, it is likely to cut its long-term economic and price forecasts as well as admit the economy remains years away from achieving the bank's 1 percent inflation target.
($1 = 78.135 Japanese yen)
(Reporting by Lisa Twaronite; Editing by Richard Borsuk)
Keywords: MARKETS JAPAN JGB/