Global Briefing: Bonds Rally in Japan

NTT's 120 billion-yen issue provides the spark.
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Markets are generally in a consolidative mode, awaiting fresh directional cues from the U.S. Global bonds are mostly higher, while major equity indices are sporting minor declines. The dollar is little changed as fear of Bank of Japan intervention helps steady the dollar near two-week lows. The major European currencies are flat.

Japanese government bonds rallied on the back of a warm reception to the 10-year bond sale by

Nippon Telephone & Telegraph

(NTT)

, ideas that the government will continue to buy its own bonds and recent reports suggesting life insurers' appetite for foreign securities may wane this year. NTT sold 120 billion yen of 10-year bonds in the second-largest corporate offering over the past year.

At 24 basis points above the government's 10-year issue, the NTT bonds were thought to offer an attractive yield, according to reports. The yield on the government's benchmark 10-year bond fell 6 basis points, marking its biggest decline in over a week. The yield now stands at 1.585%. Next week the

Ministry of Finance

, renamed the Treasury Ministry today, will auction new 10-year bonds.

The Nikkei was little changed, with technology stocks following U.S. shares lower.

The passage of a law that will make it easier for nonbanks in Japan to issue bonds may have helped lift nonbank lenders, according to reports.

For the record, Japan's February current-account surplus fell 19% from January levels to 1.12 trillion yen and was 32% lower than last February. Also in February, Japanese manufacturers reduced their capacity for the first time in eight months. Manufacturing capacity fell 0.2% in February and is 0.3% below year-ago levels. The utilization rate fell 0.4 percentage point to 94.4. Japan's excess capacity is forcing businesses to curtail capital expenditures and this is acting as one of the obstacles to a stronger economic recovery.

European bond yields are 1-2 basis points lower and equity markets are narrowly mixed.

If eurozone equities are underperforming, its bond markets aren't. The spread between U.S. and German 10-year bond yields stands at a six-week high of 137 basis points. At 76 basis points, the spread between German and U.K. 10-year bond yields is at its widest level in a year.

Italy posted a much larger-than-expected decline in February industrial production. Industrial output fell 1.3% on the month for a 3% decline on a year-over-year basis. The consensus had expected a 0.9% decline. The drop offsets a good part of the 2.1% rise posted in January. Business sentiment has also deteriorated. Nevertheless, Italy, along with the rest of the eurozone, will come under fresh criticism from the

European Central Bank

to do more to reduce budget deficits and debt levels. In its 1998 annual report (which is a bit of a misnomer given that the ECB did not exist as such last year), to be released tomorrow, the ECB will reportedly urge member countries to enact more structural reforms.

Meanwhile, higher energy prices are boosting eurozone inflation measures.

Germany reported a larger-than-expected rise in March wholesale prices. The 0.7% monthly increase was almost twice as large as the consensus had forecast. On a year-over-year basis, German wholesale prices have fallen 3.6%. Spain's March CPI rose 0.4% for a 2.2% year-over-year increase. The market had expected only a 0.2% increase.

Sector rotation continues to be evident among European bourses. Cyclicals are being favored over more defensive issues. Autos and steel are among the favorite sectors, while merger activity in the chemical industry continues to help those shares. Technology shares have been pressured by the selloff in the U.S. and disappointing first-quarter results from

Deutsche Telekom

(DT) - Get Report

.

The dollar is flatlining today.

Fear of Bank of Japan intervention has prevented much follow-through yen-buying after yesterday's sharp advance. No intervention was reported, but officials have made it clear that a sustained rise in the yen is premature. The 119.25- and the 119.80-yen levels should cap the dollar's upticks in the near term. There is talk that some leveraged fund managers have unwound some of their yen carry trades, in which they short the yen and use the proceeds to buy higher-yielding assets. This, coupled with foreign demand for Japanese equities, ideas that Japanese life insurers may reduce their yen-selling and foreign direct investment in Japan, has weighed on the dollar since the start of the month, when Japan's fiscal year began.

Some leveraged funds are reportedly looking at using the Swiss franc as the financing currency. The

Swiss National Bank

cut its discount rate to 0.5% last week after the ECB cut rates. Since it is not as volatile as the yen, the Swiss franc may be a better (lower-risk) carry trade.

The Swedish krona continues to sport a soft profile amid concern that the new finance minister, Bosse Ringholm, may be less inclined to pursue a tight fiscal policy than his predecessor Erik Asbrink. The euro is little changed against the dollar, hovering around the $1.08 level. Short-term volatility continues to ease as narrow trading ranges are expected to persist. The overextended condition of the euro appears to be being alleivated through this sideways churning rather than a corrective bounce.

Emerging market highlights include another rate cut in Brazil late yesterday.

The overnight rate was cut to 34% from 39.5%. As unbelievable as it may sound, the fact of the matter is that the Brazilian real is a great deal stronger than anybody had expected. This gives officials a justification for aggressively reducing interest rates, which in turn help reduce the government's debt-servicing burden and help prevent a deep economic contraction.

The real has retraced more than half of the losses suffered earlier this year. That 50% retracement level is pegged near 1.7015 to the dollar. This may now act as resistance. The next retracement objective is seen near 1.58.

Meanwhile, short-term Mexican interest rates rose for the first time in six weeks at yesterday's auction.

The yield on the benchmark cetes (T-bills) rose 28 basis points to 20.75%. The Mexican peso and bolsa have been among the best performers in dollar terms thus far this year.

Lastly, note that government of the world's largest democracy, India, may be faltering. The 13-month-old coalition government appears to be struggling to maintain its majority following the withdrawal of support from a key ally. This is weighing on the Indian rupee, which is near its lowest level in more than a month. The prime minister now must prove that he still commands a majority in parliament.

Marc Chandler is an independent global markets strategist who writes daily for TheStreet.com. At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

commentarymail@thestreet.com.