The dollar to the rescue!
The benchmark 30-year Treasury bond is sharply higher this morning, taking back about half of the ground it lost in
Friday's rout. It was lately up 28/32 at 98 9/32, dropping its yield 6 basis points to 5.37%.
There are almost certainly some investors who are buying because they think the selloff was overdone. But the main force behind the rally is a sharp rise in the dollar against both the yen and the euro, following unusually frank dollar-supportive comments by a Japanese government official in Tokyo overnight. A stronger dollar supports Treasury prices in two ways -- by helping contain inflation in the U.S. (by keeping import prices down), and by making bonds more appealing to foreign investors, who stand to make a currency profit if the exchange rate keeps rising.
The dollar-supportive comments came from
Japan Vice Finance Minister for International Affairs Eisuke Sakakibara
, a.k.a. Mr. Yen. According to Japan's
news service, he was quoted as saying he "welcomed" the drop in the yen that occurred after the
Bank of Japan
cut the country's key short-term interest rate on Friday.
"The fact that he said that so boldly I think turned a lot of heads," said Amy Ary, senior analyst at
Thomson Global Markets
. Sakakibara is "very calculating in what he says," she explained. "For him to say something so bold, so forthright -- 'Yes, we want a stronger dollar' -- is meaningful. It marks a shift from not opposing a strengtheneing yen to pressuring it lower." The dollar was lately worth 118.02 yen, up from 114 on Friday.
The fact that the dollar is driving the move in Treasuries is evident when one looks at the market more broadly. Short-term notes, an indicator of expectations for the interest rates set by the
rather than of inflation expectations, are continuing to move higher in recognition that U.S. economic growth isn't slowing to the degree that had been expected. The two-year note, for example, was lately down 2/32, lifting its yield to 4.94%, the highest since Sept. 8. The difference in yield between the long bond and the two-year note, a popular measure of the yield curve, has shrunk to 43 basis points this morning, from 52 on Friday. That's the flattest curve since Dec. 29.
"We're getting a significantly flatter curve today, suggesting that people see more stability," said Mike Cloherty, market strategist at
Credit Suisse First Boston
. "It had been fairly steep before, reflecting expectations of more easing" by the Fed. "With the flattening, that's been unwound. If anything, it's shifting the other way." The fed funds futures contracts have begun to reflect expectations that the Fed will raise rates by year-end, Cloherty noted.
Given that dealers are trying to unload the $35 billion of new Treasury issues that were auctioned last week, Cloherty thinks that the emergence (or nonemergence) of a bias to sell on upticks will prove a telling indicator of support for the market in general. "Anyone who bought at the auction last week is seriously under water," he said. "It'll be interesting to see whether people are willing to hang in, or whether they'll sell on the upticks. They've been hanging in reasonably well so far. If we're still up a point at the end of the day it would suggest people are willing to live with the pain."