September 15, 2010 / 5:25 PM / 7 years ago

TREASURIES-Bonds gain as Japan moves to curb yen's rise

5 Min Read

* Market rebounds on bets before likely Japan's debt buy

* Doubts whether Japan's move will hold down yen for long

* U.S. Fed buys $3.9 bln in intermediate government issues

* Fed, BoJ at risk of undermining each other's efforts

(Updates market action, adds fresh quotes)

By Richard Leong

NEW YORK, Sept 15 (Reuters) - U.S. Treasury debt prices rose on Wednesday as Japan's move to stem a rising yen spurred bets that the world's No. 3 economy will reinvest their dollar purchases back into U.S. government debt.

The market recovered from earlier losses tied to hopes that Japan's first currency intervention in six years would keep the global recovery intact.

As Japan's currency campaign sparked the dollar's biggest one-day rally against the yen in nearly two years, trader sentiment grew that the Bank of Japan will plow their dollars into Treasuries in the coming days, even though it said earlier it is ready to leave its intervention unsterilized, a phrasing to signal that it is not buying Treasuries. [ID:nTKX006996]

"Today's move is in anticipation of that (BoJ buying)," said Anthony Valeri, market strategist with LPL Financial in San Diego. "The intervention is positive for the Treasuries market, especially short-dated issues which Japan will likely focus on."

Dealers suggested Wednesday's intervention amounted to about 300-500 billion yen ($3.6 billion-$6 billion), though some Japanese media cited market sources saying the amount was closer to 1 trillion yen. In the 2003-2004 intervention campaign, it spent 35 trillion ($409 billion). [ID:nTOE68E02W]

Also fueling the rise in Treasuries was expectations that the Federal Reserve will enlarge its government debt purchases using proceeds from maturing mortgage securities it owns.

On Wednesday, the Fed bought $3.9 billion in U.S. government debt maturing in four to five years. It has spent $21.5 billion of those funds to buy Treasuries since August. For more, see [ID:nN20EDTABL]

In the cash market, five-year Treasuries US5YT=RR rose 4/32 in price to yield 1.42 percent, down from 1.44 percent late Tuesday, while two-year notes US2YT=RR were up 2/32 to yield 0.48 percent, down from 0.50 percent late on Tuesday.

Longer-dated debt lagged their short-dated counterparts. Benchmark 10-year notes US10YT=RR traded 6/32 lower for a yield of 2.71 percent, up from 2.68 percent late on Tuesday. The 30-year bond US30YT=RR was down 1-6/32 for a yield of 3.87 percent, up from 3.80 percent late on Tuesday.

Complications for Fed

Many traders were skeptical whether Japan's currency move will have a lasting impact on weakening the yen, as there has been increased market talk that the Fed will grow its balance sheet to buy Treasuries in a bid to help the U.S. economy.

Thursday's U.S. data signaled slowing growth in the manufacturing sector, which has been the lone bright spot during this uneven recovery. [ID:nN15145257] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a graphic on N.Y. Fed manufacturing data, see: here

For a graphic on U.S. industrial output, see: here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Some analysts have predicted if U.S. growth were to slow further, the U.S. central bank will reinstate quantitative easing measures it had first adopted it late 2008 to combat the global credit credit.

These forecasters expect the Fed could implement what they call "QE II" and buy up to $1 trillion in Treasuries by early 2011. Such a move could push U.S. yields lower and weaken the dollar, and in turn strengthen the yen, analysts said.

"This could possibly counteract the (BoJ) intervention," LPL's Valeri said.

The U.S. central bank is scheduled to hold a policy meeting next Tuesday.

Analysts cautioned the Fed and the BoJ could run the risk to undermine each other efforts.

"The more Fed has to do more QE. Japan has to do more interventions," said George Goncalves, head of U.S. rates strategy at Nomura Securities International in New York. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Stories on yen strength, intervention: [ID:nECONJP] PDF on yen's rise: Reuters Insider TV-Dlr bounce: Graphic on yen strength: Japan political risk: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Additional reporting by Emily Flitter; Editing by Diane Craft ; +1 646 223 6313; Reuters Messaging:

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