Bond Market Waits for Data; Long End Weakens

It was another lackluster session for the bond market, which eroded slightly today on very low volume and not much conviction. With a full slate of data expected near the end of the week, including the April employment report, the market was quiet all day.

The most significant economic release was the new home sales report, which showed an increase in the seasonally adjusted annual rate of sales to 966,000 in March, up from 924,000 the previous month. That rate is the highest since November 1998, and contributed to the weakness in bonds -- confined to the long end.

The 10-year benchmark note was off 5/32 to 101 11/32, boosting the yield 3.4 basis points to 6.31%. The two-year note was up 3/32 to 99 12/32, dropping the yield to 6.707%. Part of today's action was a rebound from last week, when the short end was weaker, reflecting concerns that the Federal Reserve could raise the fed funds rate by 50 basis points at its May 16 meeting.

But with a funds rate at 6.50%, analysts don't feel justified in trading the 10-year bond at its current yield or the 30-year bond at less than 6%. It fell 14/32 to 103 4/32, yielding 6.024%.

"I think [the long end] is catching up a little bit," said Jim Kochan, senior bond market strategist at Robert W. Baird in Milwaukee. "In my mind, it's impossible to maintain yield on the long Treasury below 6% if the funds rate is going to 6.5% or 7%. If you really pressed a lot of analysts or observers on where do you think the funds rate will peak out, 7% will come to mind."

For once, the market's shifts were not built on the fortunes of the equity market, although the weakness in stocks in the last hour of equity trading put a little bit of positive bid into the bond market, as stocks finished near their worst levels of the day.

"The short part of the yield curve has hung in pretty well, I think because of weakness in equities," said Bill Hornbarger, fixed-income strategist at A.G. Edwards in St. Louis.

Low volume tends to exaggerate a particular move in the market, and today was no different. Tracker GovPX reported just $28.9 billion of securities changing hands today, 27.6% less than the average Tuesday in the past month.

The Treasury market is awaiting tomorrow's quarterly refunding announcement, where the Treasury Department will announce the size of the five- and 10-year note auctions.

The day's only other monthly economic release was the index of Leading Economic Indicators, released by the Conference Board, a release that the market never reacts to on a short-term basis. The index rose 0.1% in March, after decreasing 0.3% in February.

Tomorrow, the Federal Reserve will release the Beige Book, an anecdotal survey of nationwide economic conditions that sometimes contains little nuggets of information not yet in government data, such as employers thoughts on rising inflation or tight labor markets.

Currency and Commodities

The dollar fell against the yen and rose slightly against the euro. It lately was worth 108.46 yen, down from 108.74. The euro was worth $0.9084, down from $0.9169. For more on currencies, see TSC's Currencies column.

Crude oil for June delivery at the New York Mercantile Exchange rose to $26.89 a barrel from $25.90.

The Bridge Commodity Research Bureau Index rose to 216.82 from 215.84.

Gold for June delivery at the Comex rose to $277 an ounce from $274 yesterday.