NEW YORK Japanese demand for U.S. government debt might not waver after last week's devastating earthquake and tsunami that killed at least 10,000 people and could cost over $170 billion.
Doubts over Japan's appetite for Treasuries came as benchmark Treasury yields touched six-week lows with investors scrambling for less risky assets in light of the European debt crisis and turbulence in the Middle East and North Africa.
"The Middle East situation has not gone away, and now you we have a human tragedy thrown in," said Greg Faranello, head of global markets trading and treasury with Espirito Santo Investment in New York.
Japan has been a big buyer of Treasuries in recent years, in part to help its exporters by holding down its currency against the dollar. It purchased about $260 billion of U.S. government debt in the six years through 2010, with two-thirds of those purchases coming last year alone, according to portfolio flow figures from Japan's Ministry of Finance.
Some analysts said Japan would pour money to rebuild damaged roads, rail and other infrastructure, reducing funds that would otherwise go into buying U.S. government securities.
The big fear at the Fukushima nuclear complex, 240 km (150 miles) north of Tokyo, is of a major radiation leak.
But others analysts argue the disaster does not necessarily mean Japan, the second-largest holder of U.S. Treasuries behind China, will cut back on its U.S. debt purchase.
"It's too soon to know what it means economically. The story is still unfolding," Faranello said.
Worries about Japan and the rest of the world have shaken investor confidence and global stock markets, with Wall Street falling 1 percent.
"We have an uncertainty bid going on in Treasuries; they are a place to hide out until things become a little more clear," said Lou Brien, market strategist at DRW Trading in Chicago.
Benchmark 10-year notes last traded up 14/32 in price to yield 3.35 percent, down from 3.40 percent late Friday, while two-year notes were last up 3/32 to yield 0.60 percent, down 0.65 percent late on Friday.
Long-dated bonds lagged shorter maturities, with some speculation Japan may sell some of its hefty long-dated U.S. debt holdings to pay for rebuilding claims.
Thirty-year Treasury bonds were trading 14/32 higher in price to yield 4.53 percent, down from 4.55 percent late Friday.
Japanese companies and insurers were cited as dumping foreign assets and bringing cash back to Japan after the 1995 Kobe earthquake, one factor behind the yen's surge to a record high against the dollar that year.
While foreign affairs dominated investors' attention on Monday, some were looking ahead to Tuesday's Federal Reserve policy meeting and what it held for the recent largest purchaser of Treasuries -- the U.S. central bank itself.
The Fed in November announced a new program of government securities purchases, dubbed QE2, intended to bolster the economy. Under the program, the Fed intends to buy about $600 billion of Treasuries and Treasury inflation-protected securities through the middle of 2011.
The Fed has purchased about $495 billion of Treasuries and TIPS since August. On Monday it bought $7.56 billion of Treasuries maturing May 2018 through February 2021.
(Editing by James Dalgleish)