The worst-ever performance by Japanese government bonds in Tokyo trading triggered heavy selling of U.S. Treasuries overnight, but with U.S. stocks meandering, bond prices are recovering somewhat.

The benchmark 30-year Treasury bond, down as much as 1 4/32 earlier, was lately down 28/32 at 102, lifting its yield to 5.12, the highest since Nov. 27. Volume continues to be light, however, as it typically is at year-end, exaggerating the market's moves. According to tracker

GovPX

, at 10 a.m. volume was 36.4% below average for a fourth-quarter Tuesday.

"Weakness in the equity market is helping, but for the most part we just got a bit oversold," said Rob McCool, senior trader at

First Chicago Capital Markets

.

The

Fed's

monetary policy committee is holding its final meeting of the year today, but so unanimous is the opinion that

Alan Greenspan

and friends will leave the key fed funds rate unchanged at 4.75% that the meeting is having absolutely no effect on trading, market watchers said. No major economic indicators are scheduled for release today.

Japanese government bonds -- JGBs -- tanked for the second day in a row today after the

Finance Ministry's Trust Fund Bureau

, which invests public pension funds and owns more than a third of all outstanding JGBs, said it will no longer buy long-dated paper in the secondary market. On Monday, Japanese yields rose after the government announced plans to issue twice the volume of bonds in '99 as it did in '98, to finance a big increase in government spending to stimulate the economy.

If the moves were aimed at steepening the Japanese yield curve to encourage more bank lending to stimulate the economy, that's what they did. The yield on the benchmark 10-year JGB shot up 39 basis points today, from 1.51% to 1.90%.

If, on the other hand, higher interest rates stifle an economic recovery in Japan, that should ultimately benefit U.S. Treasuries. But for now, the much higher yields on JGBs prompted selling of long-dated U.S. bonds by some Japanese investors, steepening the U.S. yield curve as well.

"The potential implications

of the higher Japanese yields are that people sell Treasuries and buy JGBs because the spread has narrowed significantly," said John Burgess, head of fixed-income at

Bankers Trust

. Treasury yields are still much higher -- the 10-year note is currently yielding 4.68%. But for Japanese investors who want to avoid the currency risk of owning Treasuries, JGBs have suddenly become far more appealing.