The bond market rose aggressively on the back of an overnight Japanese rally in the morning, but cooled off midday as skeptical heads took control. But the dollar's rise against the yen, in consort with the equity and commodity weakness, pushed the market higher in the last hour of trading.

Lately the 30-year Treasury bond was up 1 2/32 to trade at 98 16/32, as the yield declined to 5.351%.

Bonds were up more than a point in the early going, boosted by the overnight rally in Japan. The benchmark 10-year JGB fell from 2.135% Monday to 1.985% last night after

Ministry of Finance

officials said they would resume bond purchases in February and March.

Finance Minister Kiichi Miyazawa

also said the ministry would reallocate planned issues across the yield curve to reduce long-term debt. The amount of 10-year JGB issues will be cut from 1.8 trillion yen to around 1.4 trillion yen in March, while two-year JGB issues will rise by 300 billion yen and six-year bonds by 100 billion yen.

U.S. bonds have tended to rally or sell off in conjunction with moves in the Japanese bond market, so the early rally was expected. Even though Japanese officials finally addressed rising yields, on a long-term basis the Japanese market is facing a deluge of new government supply. The MOF's bond purchases are only equal to the amount they were buying prior to the announcement they would discontinue sales at the end of December.

"People viewed the rally in Japan with skepticism, believing it might not be sustainable," said Tony Crescenzi, chief fixed income strategist at

Miller Tabak Hirsch

. "Very few countries can tout lower interest rates when their budget deficits are going to be higher. The amount of supply they're buying is piddly in comparison to the amount they're issuing."

Japanese officials are worried about higher long-term interest rates because they can potentially undermine the prospects for an economic recovery. Higher rates boost borrowing costs for companies, and in recent weeks they have also had the affect of strengthening the yen against the dollar. This hurts Japanese exporters, because it raises the price of Japanese goods against other currencies.

Dennis Hynes, strategist at

R.W. Pressprich

, was more skeptical, because he believes that the MOF's decision to purchase JGBs is just a half-step from monetization to pay off increasing debt supply in Japan.

"What's happening here is that we're frightened by the huge supply coming down the pipe," Hynes said. "The only reason they're buying is to keep a lid on yields. We would use any rallies as an opportunity to sell bonds."

What turned the market around, however, were a few of the same factors that have boosted bonds on various days in the last six months. The stock market, which was moving smoothly along, burned out. The

Nasdaq Composite Index

was the weakest, closing underwater on the day.

The dollar continued to rise against the yen and was lately up 2.49 yen to 118.04, just off the 118.70 high. The

Bridge/CRB

index fell to a new 24 year-low, closing at 184.33. The last time the market was this low was in July 1975, when the index closed at 183.50, according to Crescenzi.

These late factors made the day look better than it was shaping up to be at 1 p.m., when the bond was only up 14/32.

GovPX

volume was light, down 22% as of 3:00 p.m. EST when compared to the average Tuesday. The activity indicates the market was oversold at the end of last week.

"It's a lot of short-covering," Crescenzi said. "The market is not looking well. Many people had gotten short, thinking the market was going to fall again, but were being squeezed

in the afternoon with the market coming back."