Treasuries Shake Off Dollar Weakness

With a little help from Brazil and the rumor mill, yields fall for the fourth session in a row.
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Early weakness in the bond market due to the shellacking the dollar took gave way to strength as the day wore on, and Treasury prices rose for the fourth consecutive session. The benchmark 30-year issue saw its yield drop to 5.99%, its first close below 6% since July 22.

Market participants attributed the turnaround to the view that has recently come to prevail that the

Fed

is unlikely to hike interest rates more than once more this year, as well as to a selloff in the Brazilian stock market and rumors that a key German economic indicator due out overnight will be weak.

The benchmark 30-year Treasury bond finished the day up 6/32 at 101 26/32, trimming its yield 2 basis points to 5.99%. Shorter-maturity note yields likewise shed 2 to 3 basis points, depending on the issue.

Early in the session, the long bond traded down as much as 20/32 as the dollar fell to its lowest level since January against the Japanese yen. The yen soared 1.8% from 113.88 to the dollar to 111.87 after a government official was quoted in wire reports as saying that a yen in the range of 115 to 110 to the dollar probably wouldn't trigger an intervention to weaken it. The yen has been strengthening since early July, but the prospect that Japan would intervene to halt its rise, since a rising yen could thwart Japan's economy recovery, has cowed the bulls.

The dollar's fall pressured bonds for all the usual reasons: A weakening dollar is potentially inflationary, since it lifts import prices. And a weakening dollar makes it costlier for Japanese investors to continue to hold dollar-denominated Treasury securities.

But ultimately, valuations in the Treasury market are more a function of domestic than international dynamics, and with the release of benign inflation data in the last week, the gloom that has weighed on the Treasury market for much of the last year began to lift. Investors have begun to let themselves hope that the interest-rate hike the

Fed

is almost universally expected to agree upon at its meeting next Tuesday will be the last one of the year.

That dynamic eventually reasserted itself,

Paribas Capital Markets

bond strategist Ken Fan said. "The bond was trading well prior to last night," he said. "Today was just a continuation of what has been going on for the past few sessions." While it may be premature to hope so, Fan continued, "The general feeling is that the Fed is going to tighten once and that's it."

Of course, it also helped the Treasury market that after a steep initial fall, the dollar stabilized.

In addition, Brazil's

Bovespa

stock index lost 2.7% today to its lowest level since March, sending some money into the relative safety of Treasuries.

Finally,

Credit Suisse First Boston

senior market economist Mike Cloherty said rumors swept the market that Germany's

IFO Business Sentiment Index

, a monthly survey whose July edition will be released at 4 a.m. EDT, is going to be on the weak side. Because it is a private survey rather than a government survey, rumors about a leak of the IFO index get taken more seriously.

The index rose to 92.9 in June from 90.5 in May, and is forecast to rise to 93.5 in July by economists surveyed by

Market News International

.

"Germany has sort of been the laggard in Europe, and people have been anticipating that it's going to pick up," Cloherty said. "If the report is softer, that would make people question that."