Treasuries Rally as Japan’s Nuclear Reactor Risk Spurs Demand for Refuge


Treasuries surged, pushing 10-year note yields to their lowest level this year, as Japan’s Prime Minister Naoto Kan asked for calm as engineers worked to cool nuclear reactors damaged by last week’s earthquake.

Yields on 10-year notes fell the most in almost three months as the Bank of Japan’s efforts to provide liquidity and expand an asset-purchase program failed to stem investor panic, which sent the Nikkei 225 Stock Average down as much as 14 percent and sapped U.S. stocks. Two-year note yields slumped as Federal Reserve policy makers began their meeting in Washington.

“This rally is a surprise to everybody,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc. “It’s the fear of the unknown. Most people think that when there’s a natural disaster, the economy will dip for a period and then come roaring back as they rebuild. The events playing out in Japan could be much different.”

Yields on 10-year notes decreased nine basis points, or 0.09 percentage point, to 3.27 percent at 11:12 a.m. in New York, according to BGCantor Market Data. The price of the 3.625 percent note due in February 2021 rose 3/4, or $7.50 per $1,000 face amount, to 102 31/32.

Benchmark 10-year yields touched 3.20 percent, the lowest level since Dec. 10, falling as much as 15 basis points in the biggest intraday drop since Dec. 29. Two-year note yields slid as much as nine basis points to 0.50 percent, the lowest level since Dec. 7. Yields on 30-year bonds decreased as much as 12 basis points to 4.41 percent, the lowest since Jan. 5.

Pimco’s View
Japanese investors will repatriate funds as the nation seeks to recover from its strongest earthquake on record, according to Mohamed El-Erian, chief executive officer at Pacific Investment Management Co.

While inflation and the deficit will rise, Japan will be able to navigate the economic shock, El-Erian, who’s also co-chief investment officer, said via telephone in a radio interview on “Bloomberg Surveillance” with Tom Keene.

Japan’s holdings of Treasuries rose for an eighth straight month to $885.9 billion in January, the longest period of increases since a 22-month span ended in August 2004, the Treasury Department reported today.

Short-term Treasury bills accounted for $62.5 billion, or 7.1 percent of Japan holdings, according to Treasury Department figures. Japan is the second-largest foreign lender to the U.S. after China, whose holdings fell for a third month to $1.15 trillion.

March Repatriation

Even as Japanese investors typically repatriate assets in March for the country’s fiscal year-end, their holdings of Treasuries rose 2 percent in March 2010 and haven’t decreased in March since 2007.

The Bank of Japan added 8 trillion yen ($98 billion) to the banking system today after BOJ Governor Masaaki Shirakawa pledged yesterday at a news conference in Tokyo to keep pumping cash as needed following the addition of a record 15 trillion yen to the economy.

The central bank doubled its asset-purchase program yesterday to 10 trillion yen, an increase that’s about one-tenth the size of the Fed’s program of buying Treasuries.

Japan’s Prime Minister Kan called for calm as the government battled to cool three quake-damaged nuclear reactors with seawater and Tokyo shoppers stripped water, food and batteries from supermarket shelves.

Radiation Readings
Chief Cabinet Secretary Yukio Edano said radiation readings outside reactors rocked by explosions were falling below levels that are harmful, while a fire at a separate unit appeared to have been put out. Earlier, Edano had said the steel unit containing the radioactive core of one reactor had been damaged and warned of dangerous contamination.

The Nikkei 225 (NKY) Stock Average had its biggest two-day decrease since 1987, while the Standard & Poor’s 500 Index tumbled 2.2 percent and the MSCI World Index of developed nations fell 2.8 percent.

The cost of credit-default swaps insuring Japanese sovereign bonds climbed to a record today, according to credit-default swap traders.

Five-year contracts on Japan’s government debt rose 24.5 basis points to 121 basis points. They earlier soared to 122.3, according to CMA, the highest level since the data provider started gathering prices in 2004.

The jump means investors perceive Japan to be slightly more creditworthy than South Africa at 126.3 basis points and Colombia at 115.5 basis points and less than Brazil at 114.9, CMA prices show.

Credit-Default Swaps

Credit-default swaps, which typically rise in price as investor confidence deteriorates, pay the buyer face value if a borrower fails to meet its obligations, minus the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

In the U.S., Fed policy makers were almost certain to fulfill their plan to buy $600 billion in Treasuries, a survey of economists showed. How they finish the purchases and what they do next is a matter of disagreement as the Federal Open Market Committee began a one-day meeting and planned to issue a statement at 2:15 p.m. Washington time.

Of 50 economists surveyed by Bloomberg News last week, 49 said the Fed will buy the full amount of bonds in a bid to boost the economy. Thirty-one said the central bank won’t adjust the pace or duration of the purchases, as it did in the first round of quantitative easing in 2009-10.

All 101 economists in a Bloomberg News survey expected the Fed today to hold its target rate for overnight lending at zero to 0.25 percent, where it has been since December 2008.

“The FOMC meeting will take a back seat because of such turmoil and nervousness” related to the earthquake in Japan, said Martin Mitchell, head government bond trader in Baltimore at Stifel Nicolaus & Co., a brokerage firm. “The entire curve rallied in tandem overnight.”

The difference between the upper end of the Fed’s target and 10-year note yields fell to 3.02 percentage points, the narrowest in more than three months.

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