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Bonds See Choppy Trading on Dollar Drift, Housing Data

Routine open-market operations by the


helped the bond come off another bout of early-morning weakness today.

The long bond closed up 2/32 at 99 6/32, putting the yield at 5.56%, but that apparent inaction belied a somewhat choppy session. Treasuries got off to a bad start, as the dollar continued to drift lower and stronger-than-expected July

housing starts

quieted some of the Fed's-gonna-ease chatter heard on Wall Street lately.

Expectations as reported by Reuters

Currency traders attributed much of the dollar weakness to the continued jawboning of Japan's vice finance minister for international affairs,

Eisuke Sakakibara

. For the fourth trading day running, "Mr. Yen" warned the financial world that the

Bank of Japan's

entry into the market was imminent. "The opportunity for yen-supportive intervention is drawing near," he said.

One imagines that the currency market will eventually call Sakakibara's bluff, but for the moment there are reasons to believe he is in earnest.

Yesterday saw the Bank of Japan selling two- and five-year notes -- perhaps raising cash for a little dollar-selling.

There is also a good deal of speculation in the market that next week may see some sort a Japanese bank go belly-up. A senior

Liberal Democratic Party

member and former head of the party's policy affairs research council,

Taku Yamasaki

, was quoted by several wire services yesterday as saying that Japan could "face the most difficult time within one week." (Yamasaki later denied making the remarks.) Some have taken this as a suggestion that Japanese banks will be facing a major cash-flow problem next week and may be unable to meet obligations.

Given what officials have said, it seems unlikely that the government will let any of the country's 19 major financial institutions go under, arranging instead for any weak banks to merge with strong ones in continuance of the old convoy system. But it would not be surprising to see the government let some of the large regional banks go under.

Such a sacrificial-lamb policy would likely spark a little short-term pressure on the dollar, but unless the government linked it with a more substantial effort at reform, those effects would remain short-lived.

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"We've seen them use bank and brokerage failures," said Kevin Flanagan, money market economist at

Morgan Stanley Dean Witter

. "We've seen them

use that before and it hasn't worked. True reform measures are needed and until they do that they're going to continue to be punished. You need something more than symbolic acts."

But nervousness about a symbolic act was enough to help send dollar/yen down 0.95 to 143.72 today.

An 11-year high on housing starts helped add to the pressure in the morning.

"The market's haven't been paying much attention to the domestic data," said Suzanne Rizzo, U.S. economist at


. "But it did raise some eyebrows since it was a very strong number." Still, the tone on starts wasn't surprising -- rates are low, commodity prices are low, people are making money, so it's not hard to see why construction is up. It's just that economists keep on forecasting robust starts and starts keep on coming in higher.

But the market's early weakness reversed itself later in the day when the

New York Fed

, acting on behalf of its parent, bought $1 billion in Treasury notes and bonds in what is called a coupon pass. (The Fed buys to increase the money supply, and sells to decrease it.) True, $1 billion is not really such a big deal in the Treasury market, but in the relatively illiquid days of August, when most of Europe has already closed up shop, the coupon pass had an effect. And investors were surprised to see the Fed buying across the yield curve.

"Despite taking only $1 billion out of the market, they were reasonably aggressive," said Douglas Burtnick, managing analyst at

Thomson Global Markets

. And then stocks lost ground in the last hour of trading, giving Treasuries the nudge they needed to end the day the way they started.

Given the significant backlash in the nation's editorial pages today to

President Clinton's

Monday-night address, one might suppose that the latest chapter of

Dresses, Ties and Audiotape

would be a factor in today's trading. Not the case.

"We have been down this road for four years," said Flanagan. "Until we get something concrete, you don't do anything."

Expectations as reported by Reuters