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 Yen100 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 Yen101.61 (USDJPY) 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) climbed 3.5 basis points on the day to 1.847%, while the 30-year bonds (30_YEAR) rose nearly 3.5 basis points to 3.047%. The 5-year note(5_YEAR) 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, , 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 Yen100 benchmark, Lyngen said. That tone has reverberated through the financial markets, sending oil(CLM3) and gold(GCM3) lower. Stocks, meanwhile, opened up, with the Dow Jones Industrial Average (DJI) rising 11 points and the S&P 500 index (SPX) 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 Yen283.1 billion ($2.83 billion) of securities overseas compared with Yen117 billion within the country.
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