Bonds Follow Dollar Higher on Japanese Disappointment

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Bonds are trading up this morning, following the dollar higher after the meetings between U.S. and Japanese finance officials in Tokyo over the weekend failed to produce any new plans by Japan to stimulate its economy. There are no major economic releases today. At 11:50 a.m. EDT the dollar was up 0.79 yen at 137.84, and the benchmark 30-year Treasury bond was up 9/32 at 106 24/32, its yield easing to 5.65%.

The reaction to the news is weaker than it would have been had the Japanese disappointment come as a surprise. On

Friday, bonds and the dollar rallied late after Treasury Secretary

Robert Rubin

warned the markets not to expect major policy changes by the Japanese. Many investors had been anticipating a ground-breaking announcement as a follow-up to the Treasury Department's Wednesday intervention in the currency market to break the rapid descent of the yen, which had fallen to 142 to the dollar. The intervention pushed it back to about 136.5.

"Last week's big selloff was triggered by the intervention and fear that the intervention was going to be backed up by significant changes in Japan," Josh Stiles, senior bond strategist at New York market research firm

I.D.E.A.

, said. "Now it looks like any changes by Japan will be very gradual, and nothing specific is going to come out of the weekend."

So a rising dollar is once again helping push bonds higher, together with expectations that inflation will remain under control and the shrinking supply of Treasury securities as the federal budget deficit shrinks. But they'll have a tough time rising much higher this week, with little economic data on the calendar to help justify such a move and a heavy supply calendar, Stiles said. The Treasury's monthly auction of two- and five-year notes takes place Tuesday and Wednesday, and a large volume of corporate issues is expected this week, to take advantage of historically low long-term interest rates.

Maybe it's just as well that bonds and the dollar don't get ahead of themselves. "We see coming back in the same old skepticism, that Japan keeps making promises but never delivers," Stiles said. "That's a dangerous presumption. There is a threshold of pain where they're going to have to deliver, and we're getting close here."