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BOND PRICES SHOWS VALUE OF JAPANESE U.S. ISSUES COMPETE WITH RECENT RATE RISE

BOND PRICES SHOWS VALUE OF JAPANESE U.S. ISSUES COMPETE WITH RECENT RATE RISE

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The Japanese have gotten slammed by some Americans for their highly visible investments in U.S. business properties ranging from Columbia Pictures to Rockefeller Center.

But this past week's slump in bond prices suggests that the U.S. government and those holding its debt should put out the welcome mat for Japanese investors in Treasury securities.Over the past few years, the Japanese have been steady and substantial customers at the quarterly securities sales, where the government has borrowed heavily to finance its expanding debt.

Market watchers estimate the Japanese typically buy 25 percent to 35 percent of new Treasury issues maturing in 10 to 30 years.

As a result, some analysts argue, the government has been able to peddle its securities at lower rates of interest than it would have to pay otherwise.

But worries about whether Japanese investors will be big buyers of the Treasury's expected $30 billion auction of new securities over the next few weeks have weighed heavily on bond prices.

Those concerns have stemmed from a recent rise in Japanese interest rates that has narrowed the difference in yields available on Japanese securities relative to U.S. notes and bonds.

William Griggs, a partner with the investment firm Griggs & Santow Inc., said 10-year Japanese notes, for example, were yielding about 1.35 percentage points below the yields on 10-year Treasury notes earlier this month, compared with a 2 percentage point difference at the start of the year.

While the difference in yields has since widened toward 2 percentage points in more recent days, William V. Sullivan Jr. of Dean Witter Reynolds said the more typical yield spread has been 2.5 to 3 percentage points.

The fear among U.S. bondholders is that some Japanese investors will find current yields in Japan rewarding enough that they will decide against taking the extra risks involved in converting yen to dollars and buying Treasury issues.

That could drive U.S. rates higher, depressing the value of bonds already trading in the market.

The realities of what can happen when foreign investors sit out a bond auction were illustrated this past Tuesday when the Resolution Funding Corp. had to pay higher rates than many market professionals had anticipated to find buyers for its $5 billion issue of 40-year thrift bailout bonds.

The Japanese had not been expected to bid on the bonds, which carry maturities of 10 years later than the Treasury's longest security and are expected to be far less readily salable than Treasury issues.

``We didn't expect the Japanese to be there, and they weren't,' said Robert Brusca, economist for Nikko Securities International in New York.

He said no conclusions should be drawn from the absence of the Japanese from the 40-year auction relative to what may happen at the Treasury auctions expected to be conducted in early February.

But some traders said the auction illustrated nonetheless that interest rates must often go higher than expected when the pool of bidders is smaller.

By midafternoon Friday, prices of 30-year Treasury bonds were down more than $25 for every $1,000 in face value for the week. Their yield had risen to 8.54 percent from 8.26 percent at the end of the previous Friday.

Bond prices careened lower after some press reports suggested Federal Reserve Chairman Alan Greenspan had indicated he might consider the idea of reinstating a withholding tax on investment income earned here by foreigners. The Federal Reserve later said Greenspan did not favor such action.

Griggs suspected yields were getting high enough that Japanese interest in the upcoming auctions will be strong.

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