The Bond Market That Shook The World

Tokyo's about-face has brought calm for now, but more nasty surprises lie ahead

The effect was electrifying. When Finance Minister Kiichi Miyazawa announced on Feb. 16 that his ministry would snap up $3.4 billion worth of Japanese government bonds in the ensuing six weeks, investors rejoiced. Finally, they figured, the government was showing it would be the buyer of last resort for its own bonds. That meant the government bond market would not collapse, as had been feared. Bond prices soared, bringing yields down to 1.9% from recent highs of 2.4%. And with a slew of officials also talking down the Japanese currency, the yen slid to a two-month low of 118 to the dollar. Later the same day, as Wall Street reopened after the Presidents' Day holiday, U.S. bonds rallied, too, and yields came back from the six-month high of 5.43% reached the previous Friday.

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