Japanese demand for US 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 US 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 US 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 US Treasuries behind China, will cut back on its US debt purchase.
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 US 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. 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 US 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.