HONG KONG: US Treasuries jumped on Tuesday, driving benchmark yields to a six-week low, as investors rushed for safety after reports of rising radiation levels outside Tokyo sparked panic selling of Japanese shares.
At one point Nikkei futures plunged 16 percent, dragging S&P futures down about 3 percent. But Japanese shares pared losses slightly in the afternoon on short-covering after authorities banned securities houses from selling stocks for arbitrage trading.
Traders in Tokyo and Hong Kong said hedge fund selling of Nikkei futures, especially the Singapore-listed contracts, were behind some of the deepest drop in Japanese shares. Cash volumes on the Tokyo Stock Exchange's first section hit a record for a second day running.
The situation was tense in Tokyo as Japanese leaders tried to calm citizens as well as panicky investors as news spread of a "significant" rise in radiation at the Fukushima nuclear facility and Kyodo news agency reported rising radiation in communities closer to the Tokyo.
In a choppy and volatile day across markets, JGBs also gave up gains and slipped, taking some steam out of the gains in Treasuries.
Traders cited selling by insurers to offset losses on their stock portfolios. The Nikkei fell 10.6 percent on the day and was down 16 percent so far this week, suffering the biggest two-day sell off since the 1987 crash.
The frantic buying of bonds during the day also prompted Australian money markets to price in a one-third chance the country's central bank could reverse course and start cut interest rates as soon as next month.
June 10-year Treasury futures were up 22/32 at 120-28/32, down about half a point from a six-week high of 121-14.5/32 reached during the worst of the Nikkei sell off.
Futures volume was much bigger than usual in Asia trading hours, with a little more than 260,000 lots trading by the end of the Asian day, more than triple the volume of the previous day.
S&P e-mini futures were last down 1.8 percent at 1,267.50, off session lows.
Benchmark 10-year yields were up nearly a full point in price to yield 3.274 percent, down 9 basis points (bps) on the day after falling as far as 3.207 percent.
Two-year note yields were down 6 bps at 0.545 percent, with the yield curve flattening slightly on the day.
Investors remain on guard for potential Japanese insurer or corporate selling of Treasuries to repatriate funds and cover the costs of the quake and tsunami.
But so far traders have not spotted any big Japanese investor repatriation, noting that it may take a few weeks to assess the full tally.
The Federal Reserve meets later on Tuesday and is expected to keep policy unchanged while assessing the impact of steep oil prices and the Japanese crisis.
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