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Global Briefing: Treasury Selloff Pressures Bonds

The euro has stabilized after yesterday's sharp drop.

Global equity markets have not matched yesterday's recovery on Wall Street

, but bond markets have followed the late selloff in Treasuries. European currencies have stabilized at lower levels, while the dollar is little changed against the yen.



slipped 0.3% today amid the largest selloff in government bonds since late March. An article written by the Ministry of Finance's

Eisuke Sakakibara

in the Asian edition of

The Wall Street Journal

claimed that the market could easily absorb another 10 trillion yen ($81 billion) in new government debt to stimulate the economy. Not. The yield on the new 10-year benchmark bond rose 7 basis points to 1.50%, a level not seen on 10-year obligations since late April. Sakakibara's piece is the strongest indication to date that of the intent for and size of a new supplemental budget. The news aggravates the already existing supply concerns.

Japan is still in denial.

It still seems to be unsure of what hit it and why its economy has lost nearly a decade. The credit rating agency

Standard & Poor's

, for example, denied Japanese claims that the bank's bad loan problems are over. Or look at the announcement by



that it will double its memory chip production even as prices are falling in order to garner greater market share. Japan's corporate strategy of pursuing market share above profits erodes shareholder value. It destroys capital. NEC is expected to post its earnings tomorrow.


was rewarded for reporting a six-year high in profits: Its shares rose 4%.

European equity markets are marginally higher

, led by bank and telephone issues. But the equity advance is minor compared to yesterday's rally in the




and still seems vulnerable. European 10-year bond yields are 2-3 basis points higher. The euro extended yesterday's slide, but has stabilized for the moment below yesterday's lows.

Europe simply seems a mess and officials don't seem quite know how to respond.

First, Europe suffers from weak growth. At the end of last year, as the

Federal Reserve

and the

Bank of England

were aggressively cutting interest rates, European officials were nearly broke their arms patting themselves on the back for being immune to the world economic woes. Not. Once European officials began lowering this year's GDP forecasts, budget woes were obviously going to resurface. And resurface they have Italy has officially acknowledged that its 2% deficit-to-GDP pledge would not be honored. And what could the other finance ministers do but accept Italy's demand for dispensation? Italy is still operating well within the confines of the stability pact, which means there is no recourse to punitive measures, even if the finance ministers had the stomach for them, which they don't, partly because many are likely to be in the same boat shortly.

France's first-quarter growth fell to 0.3% from 0.7% in the fourth quarter. France officially forecasts this year's growth at 2.2%-2.5%. Market estimates tend to be lower. Yesterday France reported lower-than-expected consumer spending in April. This is generally true for other large eurozone members. No convincing signs that the slowdown in fourth and first quarters has been reversed. Today's revision of the U.S. first-quarter GDP will be a reminder, as if one were necessary, of the growth differentials between Europe and the U.S.

In addition, two other factors appear to be weighing on the euro

, driving it to its lowest level yet. First, European officials do not seem very concerned about the euro's decline.

Wim Duisenberg

, the president of the ECB, told a German weekly magazine that he was not losing sleep over the euro's decline. He suggested that its decline was "natural" given the divergent growth cycles. Attempts to verbally intervene to support the euro appears to have fallen by the wayside recently. Nor does the market perceive much risk of material intervention. If the ECB won't cut rates any further, given what it sees already -- low interest rates and fiscal laxity -- the foreign exchange market will have to bear a great burden of the adjustment.

In addition, it wasn't until late- to mid-February that global bond and equity fund managers realized the nearly universal advice that they were getting from their investment banks -- that the euro was going to be strong this year -- was dead wrong. The most common currency hedging vehicle, the three-month forward contract, has expired or will expire shortly. The poor economic outlook and the backtracking on fiscal commitments, playing on investors' worst fears, is encouraging fund managers to renew their hedges, which requires selling euros.

Lastly, to this bearish euro cocktail we should add the likelihood that the U.N.

War Crimes Tribunal

will indict Yugoslav President

Slobodan Milosevic

later today on war crime charges. This will complicate efforts to negotiate a settlement to hostilities. This in turn raises the costs of the war directly, the refugee problem and reconstruction costs. At the same time, cracks in


are becoming more evident. Germany and Italy, for example, successfully blocked U.S. and U.K. efforts to enforce the oil embargo on the Adriatic.

In the U.S., the war has is doing for Clinton what Monica et al. couldn't.

The U.S. president's support rating has fallen to three-year lows.

Meanwhile, after first balking, the


has capitulated and has sanctioned Argentina's larger budget deficit. Last week it tried to discourage Argentina after the government boosted spending by $150 million on education and projected a budget shortfall of $5.1 billion instead of the previously agreed $2.95 billion. The IMF initially threatened to cut off its access to fresh international money. Yesterday's capitulation means that Argentina can access the previously negotiated $1.5 billion precautionary arrangement. This is actually consistent with the IMF's recent practice of backing off demands for cuts in government spending when an economy is entering a recession. This was essentially its stance in Thailand, South Korea and Indonesia. Who says you can't teach an old dog new tricks?

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