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Hearts and Minds

Late last week stock traders were getting on board with the pessimistic note coming from the bond market. But on Monday, they took solace from a breather in the dollar's decline and from weakness in oil, which dropped Monday after surging last week. January oil futures fell 1.6% to close at $62.44 per barrel.

Chicago Fed President Michael Moskow was in the news again Monday, reiterating in a CNBC interview his message that the economy is strong and that inflation remains uncomfortably high.

But the bond market continued to ignore the Fed's rate hike and inflation concerns, going instead on their chosen path, arguably foretelling recession. Yields slipped only marginally Monday, as traders brace for the Institute of Supply Management's read on the service sector Tuesday. It was the soft ISM manufacturing survey Friday that sent stocks plunging and bonds rallying to 11 month highs. On Monday, the 10-year and 30-year bonds rallied 2/32 to yield 4.43% and 4.54%, respectively.

"There is a fight for the heart and soul of the bond market," says William Hornbarger, fixed-income analyst at AG Edwards. "Is it the Fed or the data?"

Hornbarger believes the bond market is overbought, but that the Fed's hawkish talk is hackneyed at this point and "traders are more concerned about the economy and growth."