Treasuries Battling the Dollar's Decline

Considering the hit the dollar's taking from comments out of Japan, U.S. bonds aren't doing badly.
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Treasuries are following the dollar lower this morning, snapping a three-day gaining streak, but considering how hard the dollar is getting hit they're holding up fairly well. A

Fed

coupon pass, in which the central bank buys securities from investors in order to add enough liquidity to the banking system to keep the fed funds rate on target, helped matters a bit.

The benchmark 30-year Treasury bond was lately 10/32 lower at 101 10/32, lifting its yield 2 basis points to 6.03%.

The dollar slid against the yen after wire services reported that

Ichizo Ohara

, an aide to Japanese Prime Minister

Keizo Obuchi

, said the Japanese government probably wouldn't intervene in the currency market to weaken the yen at levels between 110 and 115 to the dollar. The statement emboldened traders to take the yen as high as 111.69, a level it hasn't closed above since Jan. 11. Lately it was trading at 112.12 to the dollar, up from 113.88 yesterday.

A stronger yen would endanger Japan's economic recovery by making its products more expensive in other countries.

In addition, there was a rumor that

Eisuke Sakakibara

, until recently the vice finance minister, had echoed the comments, but he has denied to

Bloomberg

that his stance against a premature rise in the yen has changed.

A deteriorating dollar weakens the bond market by spreading fear of rising inflation. If the dollar is falling, import prices will rise, giving domestic producers leeway to raise their prices as well. In addition, a weakening dollar depresses demand for Treasuries from foreign investors.

"Everyone is trying to figure out what's going on with the dollar," said John Burgess, managing director at

Deutsche Bank Investment Management

.

But while Treasuries are down, they're not down hard,

MCM Moneywatch

senior technical analyst Walter Burke noted. "It's positive that they're holding in relatively well, considering the dollar has been beat up so much."

Separately, despite the improvement in swap spreads in the last two weeks (swap spreads measure credit risk), there are rumors in the market this morning, echoing ones that surfaced two weeks ago, that a swap desk is in trouble. The rumors may have helped Treasuries pare their losses. The long bond was earlier down as much as 20/32.

There are no major economic indicators today.