Treasuries Get Smacked Around in the Morning

Worries about Japan and unfriendly market conditions are pressuring the fixed-income market.
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The Treasury market is getting hammered this morning. An unfavorable turn of events in Japan pushed the market down overnight and that's only adding to the panic this morning. All of the three recently refunded issues are lower this morning, and without any retail interest to provide support to the market, sentiment is toward higher yields and lower prices.

Lately the 30-year Treasury bond was down 31/32 to trade at 98 9/32, as the yield rose to 5.37%. Once equities opened and traders there began to abuse the tech stocks, bonds brightened up, bouncing off the lows. At one point the 30-year bond was down 1 11/32.

Japanese bonds sold off mildly last night, but that's not what spooked the bond market. The

Bank of Japan

, it appears, is not going to monetize its debt, a controversial move that would devalue the yen but prop up bond prices, and allay the fears of investors worried about lumbering, out-of-control new bond supply. Instead the BOJ cut the already-thin overnight funding rate to 0.15% from 0.25% and its commercial lending rate to 0.25% from 0.5%, which seems to have made nobody happy.

"It shows a continuation of the policies that have led to low money-supply growth there, and raises the prospect of the economy staying slow enough to erode their fiscal situation," said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

.

This bond-unfriendly news sent prices lower on the expectation that more repatriation to Japan was possible. At its highest, the 10-year JGB yielded 2.44%; it is currently yielding 2.08%, which indicates more room for selling next week.

Even though bonds have cheapened, the retail interest in supporting the market is absent. The interest in this week's three-day Treasury refunding was largely professional, as retail investors wet their beaks on the myriad of corporate and agency debt sold during the week. (It used to be that the corporate market got out of the way when the Treasury held its refunding, but that animal has been declawed, apparently).

Without interest from investors who would buy and hold these bonds, the buyers are traders, who are happy to hold onto a position when it's making them money but aren't interested in keeping it around while things are in bad shape. So they're selling, and only finding support from the asset allocators moving out of stocks right now.

"Why retail is not involved or interested is a tough question to answer," said Ken Logan, managing analyst at

Thomson Global Markets

. "They're spending freely in the corporate sector. It could also that they have a range trade view or even a negative view of the market. It's leaving price action and the risk burden to the leveraged community."

A leveraged community worried about more Japanese repatriation and selling over the weekend. With the bond market closed on Monday, there will be two Japanese trading sessions before the U.S. market gets back into the game, and the market is reluctant to be long heading into what could be two more disappointing sessions out of Japan.

"There's a lot of room for the

Japanese market to go down, I believe," Crescenzi said. "It is event risk. There is the of the JGB market getting roiled on Sunday night and Monday when traders aren't able to react to it."

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