Bond Market Contemplates the Pros and Cons of Lower Oil Prices

The bond market meandered again today. With no market-moving economic indicators on the docket, traders waited for direction from the energy markets, which in turn waited for the outcome of the OPEC meeting in Vienna.

"It's just so dead. All eyes are on OPEC," said Kevin McKenna, head of taxable money-market funds at Merrill Lynch Asset Management.

The oil-producing countries reportedly drew close to an agreement to increase export limits by about 1.7 million barrels a day.

But while the bond market was anxious for a final outcome, hints over the last few weeks that the cartel would probably agree to increased export limits had already worked their magic on oil prices, returning the per-barrel price to the $27-$28 range, down from a nine-year high of $33-$34 during the first week of March. In other words, the expected production hike is already in the price of oil, and might not drop it any further.

The bond market often smiles on lower oil prices, which have positive implications for inflation. But at times like these, when bond investors are impatient to see economic growth slow down, rising oil prices have a silver lining. "There's a big piece of the fixed-income market that's looking at oil prices as an exogenous tax that could only slow consumer spending and help the Fed do its job," McKenna said. In an effort to bring the economic growth rate back into line with its historical average, the Fed has hiked the fed funds rate to 6% from 4.75% since June.

Stock prices provided clearer guidance for the bond market today. Early in the session, Treasury prices got a lift from the negative action in stocks after Goldman Sachs strategist Abby Joseph Cohen recommended trimming equity exposure in her model portfolio to 65% from 70%. Cohen also recommended increased exposure to short-term bonds at the expense of long-term ones, and (not surprisingly) investors appeared to take her advice.

The benchmark 10-year Treasury note gained 6/32 to 102 15/32, dropping its yield 2.5 basis points to 6.162%, and shorter-maturity issues followed suit. But the 30-year Treasury bond ended down 2/32 at 103 23/32, lifting its yield a fraction of a basis point to 5.982%.

At the Chicago Board of Trade, the June Treasury futures contract gained 1/32 to 96 4/32.

Bond traders are awaiting an indication on whether the Fed, which is expected to continue to hike the fed funds rate, will keep moving in measured, 25-basis-point increments, or start making more aggressive, 50-basis-point moves. The only way a 50-basis-point move could be construed as positive is if the Fed indicated that no additional hikes were likely, McKenna said. And it's not likely to foreclose any options with stock prices still so high.

Traders are also looking forward to April 1, Lehman Brothers chief global fixed-income strategist Jack Malvey said. "It's been a tough quarter. Folks are winding down here."

Economic Indicators

The Consumer Confidence Index fell in March for the second month in a row, after reaching an all-time high in January. It slipped to 136.7, the lowest since October, from 140.8 in February. The January reading was 144.7. Economists polled by Reuters had forecast a smaller decline on average, to 139.9.

The two weekly retail sales reports showed continuing weakness in that sector. The BTM/Schroder Weekly Chain Store Sales Index rose 0.1%. The year-on-year growth rate fell to 0.3%, the lowest in nearly three years. This is due in part to the fact that Easter is late this year, which is delaying Easter sales from March to April.

The Redbook Retail Average showed March sales running 0.2% behind February through the first four weeks of the month. The year-on-year rate is 0.9%, the lowest number in the history of the series, which goes back to June 1996.

Currency and Commodities

The dollar fell against the yen and gained against the euro. It lately was worth 105.79 yen, down from 106.73 yesterday. The euro was worth $0.9603, down from $0.9665. For more on currencies, please take a look at TSC's new Currency Watch column.

Crude oil for May delivery at the New York Mercantile Exchange fell to $27.09 a barrel from $27.79.

The Bridge Commodity Research Bureau Index fell to 211.98 from 212.26.

Gold for April delivery at the Comex fell to $279.50 from $280.50.

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