In all the confusion, the market finally remembered Japan.
The 30-year Treasury bond was up 28/32 to trade at 102 28/32. The yield declined to 5.30%, mostly on news that the
Bank of Japan
was going to cut rates to within an inch of existence: 0.25%.
Expectations as reported by
The entire Treasury curve was benefiting from the 25-basis-point rate cut. The front end of the curve, which was slightly stronger yesterday as the long bond sold off, retained its gains and then some in early trading. The two-year Treasury was up 8/32 to 100 20/32, and the yield was trimmed to 4.79%. Dollar/yen was up 5.2 to trade at 137.28.
"We've had a five-point move in the dollar against the yen, the largest one-time hike in a day," said Gregory Carr, market analyst at
. "The Treasury has found a lot of support in that. It's remained steep on the curve. The steepness from yesterday has remained, and the curve has not flattened, which is very bullish."
The bond market curve tends to steepen when it is assumed that rate cuts are in the offing. Even though the 30-year is up almost a point today, the yield curve, which widened out to 45 basis points yesterday, was at 51 basis points.
"It suggests that over the next six to nine months that there are lower yield curves ahead," said Jack Malvey, chief global fixed-income strategist at
. Economists at Lehman believe rates should be cut by 25 basis points before the end of 1998 and probably twice more early next year.
Federal Reserve Chairman Alan Greenspan's
announcement Friday that the
Federal Open Market Committee
had removed the bias to tighten short-term interest rates came as a relief to the bond market, while the stock market used the comments as a buy signal. The
was down 108.39 as of 11 a.m. EDT.
"Yesterday's astounding and possibly overextended surge focused only on U.S. rates decreasing," Malvey explained. "The other side of his message, the weakening economic landscape, seemingly was dismissed or discounted."
The move today by the Bank of Japan underscores Greenspan's comments on the challenging global economic environment and its effect on our economy and financial markets. Although Japan's saving rate and gross investment were higher than in the U.S., their growth potential is falling.
"We did not foresee such a breakdown in Asia," Greenspan said Friday. "I suspect that the very nature of the process may make it virtually impossible to anticipate. It is like water pressing against a dam. Everything appears normal until a crack brings a deluge."
Japanese Finance Minister Kiichi Miyazawa
met with Greenspan and
Treasury Secretary Robert Rubin
Friday, economists dismissed the idea that the Japanese action was the beginning of a coordinated effort with the
nations to lower short-term interest rates.
"We're still waiting for Japan to address the problem," said Carr. "Japan has taken baby steps, but done nothing monumental."