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Another Weak Day for Treasuries

The culprit was a sharp decline in the dollar against the yen, as well as a big rally in oil prices.

The world is regarding Treasury bonds with an increasing amount of hostility, especially as investors continue to move money out of the U.S. and into other countries. Bonds were lower today, and again the culprit was a sharp decline in the dollar against the yen, as well as a big rally in oil prices.

Lately the 30-year Treasury bond was down 8/32 to trade at 100 31/32. The yield rose 2 basis points to 6.06%.

The dollar fell 2.39 against the yen to 106.44, despite Friday's intervention in the currency markets by the

Bank of Japan

. But it's the market's perception that the yen recovery reflects economic reality -- that the Japanese economy has indeed turned the corner, and the rally in yen has nullified the effectiveness of the intervention.

Japan bought approximately $2 billion to strengthen the dollar Friday, lifting it to 108.83 from 108.03 Thursday. That the Japanese intervened is a moot point now -- the dollar hit a three-year low of 106.30 against the yen earlier in the day, and it hasn't gained much since. The U.S. did not intervene in the currency markets.



Lawrence Summers

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is reluctant to prop up the dollar. He said Friday that "what's right is not to seek to manage the markets, but instead to concentrate on building the right fundamentals for our economy."

"It's mainly the Japanese who are concerned about the dollar/yen level," said a trader at a primary dealer. "The BOJ itself cannot prop up the dollar to change the general trend. Summers has been talking about a higher dollar but he doesn't want to manipulate the market."

The appreciation the yen has made against the dollar indicates that the Japanese economy, which has shown growth for the past two quarters, is recovering. The negative messages for the bond market are: One, it shows that investors are confident enough to invest money in assets other than low-risk U.S. Treasuries. Secondly, a decline in the dollar increases the price for goods we import, which is inflationary.

Among those imported goods are raw materials, which producers use to make finished goods. Commodity prices had remained relatively low even as oil prices crept up during this year, but it's getting hard to refute the rise in commodities as limited to oil.


Bridge/Commodity Research Bureau Index

of 17 commodities rose 40 cents to $203.30 today. Meanwhile, oil prices posted another big gain today, climbing 66 cents to finish at $24.21 per barrel. This is the first time the price of crude oil has closed above $24 since Jan. 31, 1997.

Josh Stiles, senior bond strategist at

, said, "There is a commodity story building but it's not just all oil." He did admit, however, that bonds seemed to be taking the rally in the currency and commodity prices in stride, perhaps because Treasury yields aren't too far from the year's highs.