By Ben Eisen, MarketWatch
NEW YORK (MarketWatch) -- Treasury prices weakened Friday morning after the Japanese yen hit a key exchange-rate threshold, pushing up yields.
The exchange rate to the U.S. dollar hit ¥100 Thursday afternoon — a psychological threshold that traders had been eying since the Bank of Japan announced easing policies — and then continued to weaken. The dollar traded at ¥101.61 USDJPY +1.02% Friday morning.
Treasury yields rose, as banks sold the U.S. government debt tied to a hedge involving the yen. The 10-year benchmark note 10_YEAR +2.43% climbed 3.5 basis points on the day to 1.847%, while the 30-year bonds 30_YEAR +1.97% rose nearly 3.5 basis points to 3.047%. The 5-year note 5_YEAR +4.12% was up 2.5 basis points to 0.779%.
The weakening yen prompted an early sell-off largely because of bank holdings of power-reverse dual-currency notes, said Ian Lyngen, senior government bond strategist at CRT Capital Group LLC.
A PRDC is a structured financial product that aims to take advantage of the interest-rate differential between the dollar and the yen. Banks hedge against these products by buying long-dated Treasurys, and rushed to sell them as the yen weakened, Lyngen said.
“There is a notion that as the yen depreciates, there is hedge-related selling in long-dated Treasurys. It tends to occur in overnight sessions,” said Lyngen.
The yen weakening also weighed on 10-year German government bonds, known as bunds, BX:TMBMKDE-10Y +6.43% , which were up 1.5 basis points on the day to 1.333%.
“The selloff in the yen accelerated in Europe, driving Treasuries lower still,” said John Canavan, fixed-income analyst at Stone & McCarthy Research Associates, in a note. “Bunds also broke through key technical levels, and the ensuing breakdown in Bunds weighed on Treasurys, although power-reverse-dual-currency-related selling reportedly dried up.”
There’s a broader tone of increased Japanese export competitiveness and decreased competitiveness in the United States that is symbolized by the ¥100 benchmark, Lyngen said. That tone has reverberated through the financial markets, sending oil CLM3 -2.20% and gold GCM3 -2.73% lower. Stocks, meanwhile, opened up, with the Dow Jones Industrial Average DJIA +0.18% rising 11 points and the S&P 500 index SPX +0.30% rising 2 points.
Friday promises to be a slow day for the Treasury market, with little economic data on tap.
“In a day like today, that negative tone will carry through,” Lyngen said.
Japan also saw investors move money out of the country for the week ended May 4 as they search for higher yields following the Bank of Japan’s recent increase in its bond-purchasing program, known as quantitative easing. Those increased outflows and the accompanying purchases of foreign securities could support U.S. markets. Japanese investors purchased ¥283.1 billion ($2.83 billion) of securities overseas compared with ¥117 billion within the country.
Ben Eisen is a MarketWatch reporter based in New York.
