Bonds Extend Slide on Japan Concerns

A selloff in the Japanese bond market weighs on Treasuries.
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While well off their worst levels of the day, Treasury prices are moderately lower again this morning due chiefly to a massive selloff in the Japanese bond market overnight, which triggered some selling of Treasuries by Japanese accounts, market watchers said.

Higher Japanese interest rates also strengthened the yen against the dollar, which is negative for Treasuries because a weakening dollar can be inflationary.

The benchmark 30-year bond lately was down 16/32 at 100 12/32, lifting its yield 4 basis points to 5.22%, the highest since Jan. 8. It was down as much as 24/32 shortly after 9 a.m. EST. Shorter-maturity note yields were higher by similar amounts, pushing the 10-year note's yield over the fed funds rate for the first time since Jan. 12.

"The reason I think we're finding support is because equities are turning down,"

Paribas Capital Markets

senior bond strategist Richard Gilhooly said.

The yield on the benchmark 10-year Japanese government bond shot up 26 basis points to 2.30% today, the highest since June 30, 1997, after Finance Minister

Kiichi Miyazawa

told reporters he isn't worried about the recent selloff, which has lifted the 10-year JGB's from 0.83% in late November. "I will monitor them carefully if the move becomes abnormal, but for now we should let the market decide,"

Reuters

quoted him as saying.

Because higher Japanese interest rates make the yen more appealing to foreign investors, the yen is rallying to its best levels against the dollar in a couple of weeks. The dollar was lately worth about 112.50 yen, down from 115.10 at yesterday's close.

The combination of the two market moves has prompted selling of Treasuries by Japanese investors aiming to avert further losses, Gilhooly said.

At the same time, the refusal of recent U.S. economic reports to concede any weakness -- highlighted by yesterday's surge in a key manufacturing indicator -- is weighing on the Treasury market, said Josh Feinman, global markets economist at

Bankers Trust

. The

Purchasing Managers Index's

rallied to 49.5 in January from 45.3 in December, affirming the view that the worst is over for that key sector. Which dims the prospects for Treasury yields much lower than they are now.

"We continue to get a barrage of economic data that make the potential for a Fed easing more and more remote," Feinman said. "In that context, before the latest selloff we were still priced pretty aggressively in Treasuries. Layer on top of that dollar weakness and the JGB backup, and you've got a formula for a backup here."

The Fed's monetary policymaking

Federal Open Market Committee

convened in Washington this morning for the first day of a two-day meeting. It is widely expected to leave the fed funds rate unchanged at 4.75%, but yesterday's rebound in the Purchasing Managers Index stirred fears that the committee might adopt a bias in favor of raising the rate in the future.

Expectations as reported by

Reuters