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Treasurys in deep retreat
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February 12, 1999: 3:07 p.m. ET
Refunding honeymoon ends; bonds greet Japan rate move with sharp dive
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NEW YORK (CNNfn) - Treasury prices plunged Friday after an overnight Japanese interest rate cut failed to inspire confidence in investors, frustrating hopes that high Tokyo bond yields will recede soon.
During the abbreviated pre-holiday session, the benchmark 30-year Treasury bond plunged 1-31/32 points to 97-14/32, while the yield climbed to 5.42 percent.
Losses remained softer at the lower end of the maturity curve, with two-year notes down 6/32 at 99-7/32, yielding 4.91 percent.
The long bond's sharp dive closed the book on a flat week for the Treasury market, which has seen 30-year prices fall 30/32 of a point since last Friday's close, while the yield climbed 7 basis points.
Analysts placed the blame for the day's retreat squarely in the lap of the Bank of Japan (BOJ), which moved to cut the Japanese overnight call rate 0.10 percent overnight.
Investors had expected the BOJ to cut interest rates, but many had hoped for a more substantial cut in the overnight call rate or perhaps even a decrease of the discount rate.
The Japanese discount rate has remained at a record low of 0.5 percent for the last three years.
"Head in the sand"?
"The Bank of Japan's feeble 10 basis-point rate cut to 0.15 percent shows the head-in-sand attitude that has led to weak money supply growth and a slow economy," said Tony Crescenzi, chief bond analyst at Miller Tabak Hirsch.
Crescenzi also noted that global traders had looked to the BOJ to more decisively curb surging Japanese bond yields by buying yen-denominated government bonds (JGBs).
In recent weeks, JGB prices have plunged, sending yields on the benchmark 10-year bond up 300 percent from their record lows hit late last year. To combat the selling pressure, many traders have expressed hopes that the BOJ will buy the bonds directly, possibly even to the point of underwriting an upcoming debt auction.
However, the BOJ's lack of action on that front quashed these hopes, disappointing many players, Crescenzi said.
"This roiled the JGB market after their close and raises the risk of more JGB losses next week," Crescenzi said. "Most worrisome for U.S. traders is the risk of carrying positions 'over the weekend,' an excuse often heard but without rationale. Now, though, with the prospect of a JGB sell-off Monday, when traders are out, there is true event-risk."
Along with other U.S. financial markets, the Treasury market will be closed Monday for the observance of Presidents Day.
However, Japanese trading desks will remain open, creating the possibility that a fresh decline in JGB prices will leave Treasury traders unable to respond.
Post-auction hangover
Analysts also pointed to more technical fears that a recent $35 billion Treasury refunding has left the U.S. bond market with more supply than demand warrants.
"Dealers underwrote $35 billion in Treasurys this week and haven't had a chance to sell it," said Joe Livornia, analyst at Deutsche Bank. "That, coupled with fears of the Fed tightening and a strong U.S. economy, is pushing bonds lower."
Livornia noted that rising Japanese bond yields were putting direct pressure on Treasury prices by encouraging Japanese investors -- traditional heavy buyers of U.S. bonds -- to repatriate their capital into the yen-denominated securities.
Flight to yen
A similar process has kept the dollar at bay against the yen, as the dollar-positive impact of robust U.S. economic data is dulled by overseas traders buying yen to put into the Japanese bond market.
By 3:00 p.m. ET, the dollar had slipped to 114.18 yen from its previous close of 114.63, bringing its advance since last Friday's close to only 1.03 yen.
The euro took the slide as a window of opportunity to climb from its overnight all-time dollar lows, creeping up to $1.1285 from its previous close of $1.1229.
Analysts said the euro's gains were largely technical, although some said reports that Germany's Finance Minister had said Germany may use fiscal spending to spur sagging economic growth were also helping lift the European currency. 
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