Bonds Refusing to Follow the Script

One of the strongest things a market can do is rally on bearish news. Not all of the news this week has been bearish for debt futures, but there has been plenty to keep advances in June T-bonds (USM3:CBOT) and 10-year notes (TYM3:CBOT) in check. Still, these contracts have shaken off the negativity and traded to within one point of their contract highs.

Debt futures shrugged at Tuesday's double whammy of bearish reports for bonds. First, the Labor Department said first-quarter employment costs doubled from the previous quarter, advancing at their fastest pace since 1990. Skyrocketing health insurance accounted for much of the increase, but wage pressure also contributed.

The second would-be hit came from the Conference Board, which said consumer confidence sprinted ahead at its fastest monthly clip in 12 years. T-bonds and notes dipped slightly, but still held above two-month highs.

More significant, T-bonds and notes failed to begin pricing in the government's very bearish announcement that, starting next week, it will begin flooding the market with debt.

The government announced that $58 billion of three-, five- and 10-year notes will enter the market next week, an all-time quarterly debt issuance record. This will be the first time in nearly five years that the government will sell the three-year note, upping the smorgasbord of debt offerings. Beginning in August, the frequency of sales of both five- and 10-year notes will also increase.

The recent rise in agriculture and equity prices should also have been a downer for debt. Even the declining dollar is a negative since the paltry yields available in U.S. debt markets are dissolved when cheaper dollars are translated into stronger currencies.

Instead of tanking, debt markets have focused this week on Federal Reserve Chairman Alan Greenspan's accommodative comments and on the weak data showing declines in manufacturing activity.