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BOJ cut doesn't spur bonds
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February 12, 1999: 9:29 a.m. ET
Effect of Japanese rate cut fades, leaving dollar adrift, bonds tumbling
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NEW YORK (CNNfn) - Euphoria over a Japanese interest rate cut faded rapidly for U.S. money markets Friday, leaving the dollar to drift and Treasury bonds to fall dramatically.
The benchmark 30-year Treasury bond was trading sharply lower at 97-29/32 by 9:00 a.m. ET, down 1-17/32 points, while the yield surged to 5.383 percent.
Losses were softer at the lower end of the maturity curve, with two-year notes down 2/32 at 99-11/32, yielding 4.85 percent.
Currency markets also oscillated on the news, with the dollar going into retreat to trade at 114.37 yen by 9:00 a.m. ET after having spiked as high as 115.78 overnight. The greenback had closed at 114.63 yen.
Bond traders said that investors initially rallied to news that the Bank of Japan (BOJ) had cut its overnight call rate from 0.25 percent to 0.15 percent.
However, the crush of buying quickly wore off. Although the bond market had been counting on the minimal rate cut, traders had hoped to see more decisive action from the BOJ to curb soaring Japanese long-term interest rates.
Fighting the Japanese yield
In recent weeks, Japan's benchmark 10-year government bond has seen its yield climb 300 percent to 2.441 percent, an 18-month high, from a lifetime low of 0.7 percent late last year.
This, in turn, has renewed demand for the yen-denominated bonds, secondarily driving global traders to increase their yen-buying efforts and curtail their dollar and Treasury positions.
The BOJ said the rate cut was partly inspired by the need to tame bond yields, but Treasury traders are hungry for more substantive efforts.
However, the BOJ has little room left to maneuver. Japan's discount rate has been at a record low of 0.5 percent for the last three years, while the bank most recently lowered the overnight call rate last September.
The BOJ said it may lower the overnight call rate again, but at 0.15 percent there isn't much downside left.
In any case, Treasury traders said activity should be light ahead of Monday's market holiday and little fresh market-driving news slated for the remainder of the session.
Euro still in cellar
Revived speculation that Europe may be on the edge of continent-wide interest rate cuts also kept the euro from lifting against the dollar.
By 9:00 a.m. ET, the pan-European currency traded at $1.1245, only marginally stronger than either its previous close of $1.1229 or its fresh record low of $1.1214 touched in overnight trading.
Currency traders said a morning announcement that Sweden is cutting its key repo rate to 3.15 percent from 3.40 percent had renewed the market's lingering conviction that rates could soon drop across Europe.
The Riksbank, the Swedish central bank, cited "somewhat weaker" prospects for economic growth in 1999 as justification for the move. 
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