Treasuries fell for a second day after Group of Seven nations said they would jointly intervene in the currency market to weaken the yen, helping boost Japanese stocks and reduce demand for safer assets.
Benchmark notes pared their biggest weekly gain this month as the yen dropped the most in two years after Japanese Finance Minister Yoshihiko Noda said each G-7 member will sell the currency as its market opens. Treasuries rose earlier as oil surged after the United Nations Security Council authorized the use of air attacks and a no-fly zone over Libya.
“Right now the foreign exchange and equity markets are greater determinants of market direction and we’ve had such a strong week of risk on-risk off that could still flip at any time,” said Peter Chatwell, an interest-rate strategist at Credit Agricole SA in London. “There remain many outside, non-financial factors: Japan, Libya, and the yen interventions add further complexity to the mix” for Treasury markets.
The yield on the 10-year note rose one basis point to 3.27 percent as of 8:16 a.m. in London, according to BGCantor Market Data. The price of the 3.625 percent security due in February 2021 declined 1/16, or 63 cents per $1,000 face amount, to 103. The yield has dropped 13 basis points this week.
The Nikkei 225 Stock Average rose as much as 3.5 percent today as the weaker yen boosted the outlook for Japanese exporters and encouraged investors to buy higher-yielding assets.
Japan began the G-7 intervention effort, Noda told reporters in Tokyo. The yen tumbled 3.6 percent to 81.69 per dollar, the biggest one-day drop since October 2008. The currency surged to a postwar high of 76.25 yesterday amid concern over radiation leaks from a crippled nuclear plant and speculation insurers and investors will redeem overseas assets to pay for reconstruction.
Declines in Treasuries were tempered by speculation unrest in North Africa and the Middle East will deepen, pushing up oil prices and boosting demand for the safest securities.
Libyan jets yesterday dropped bombs on the outskirts of Benghazi, the rebel stronghold, and leader Muammar Qaddafi said his forces would move within hours against the coastal city. The UN’s principal policy-making panel voted 10-0, with five abstentions, to adopt a resolution that establishes a no-fly zone over Libya, demands a cease-fire and allows “all necessary measures” to protect civilians.
‘Flight to Quality’
“The flight to quality movement will continue, so Treasury yields will decline further,” said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42.2 billion and is a unit of Japan’s second-largest bank. “The Middle East and North Africa situation is very severe and maybe there’s a possibility that these movements spread to Saudi Arabia or other countries.”
Oil surged 3.5 percent yesterday, the most in three weeks, after Bahraini security forces arrested opposition leaders and accused them of having ties with foreign countries.
The Federal Reserve is scheduled to purchase as much as $2 billion of Treasury Inflation Protected Securities, or TIPS, maturing from April 2013 to February 2041 today as part of the plan to use asset purchases to keep borrowing costs low.
Demand for Treasuries may be trimmed before a Commerce Department report on March 25 forecast to show the U.S. economy grew at a 3 percent annual rate in the fourth quarter, faster than the 2.8 percent previously calculated, according to a Bloomberg News survey.
Fed Bank of Dallas President Richard W. Fisher said March 7 the U.S. recovery is gaining strength and he might vote to cut short the central bank’s program of large-scale asset purchases if he believed it to be “counterproductive.” Fisher is scheduled to speak March 22 at a financial summit in Frankfurt.
The difference between yields on two- and 10-year notes widened for a second day as investors demanded a greater premium to own longer-maturity debt. The spread was 268 basis points after shrinking to a three-month low of 258 basis points on March 17.
“The fundamental backdrop for the U.S. is quite positive,” said Damien McColough, head of fixed-income research in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “At some stage you want to get short Treasuries, but you need to have a lot more certainty around the geopolitical situation as well as the nuclear situation.”