After Three Steps Forward, Bonds Step Back

Volume in Treasuries was paltry as new corporate bond issues dominated the scene.
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The Treasury market snapped a three-day winning streak today, dropping modestly on low volume amid a flurry of corporate new-issue activity. The day's only major economic release -- the Fed's Beige Book -- was market-neutral, analysts said.

The benchmark 30-year bond ended the day down 12/32 at 98 18/32, lifting its yield 3 basis points to 6.23%. Shorter-maturity note yields rose by similar amounts.

Only $31.5 billion of Treasuries changed hands according to tracker

GovPX

, 39.9% less than average for a Wednesday over the last month. Volume was light in part because there are no first-tier economic reports till the

Producer Price Index

on Friday, and in part because the year is drawing to a close.

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"Assuming the inflation numbers come out on consensus, there's no pressing need for the market to go up a lot or down a lot," said Marcello Frustaci, a trader at

Daiwa Securities

. "The risk-reward to do a big position trade now is very narrow. There's too much risk for the reward."

Limited participation in the market could make it more volatile from now till the end of the year, he added. Frustaci predicted that the long Treasury would trade in a range between 6.125% and 6.25%.

The average forecast for the November PPI, which measures prices at the wholesale level, calls for a 0.2% gain overall and a 0.1% gain at the core, which excludes food and energy prices.

The

Beige Book, an anecdotal report on economic conditions around the country compiled by the

Fed

for consideration by its monetary policy committee, which meets for the eighth and last time this year on Dec. 21, contained no big surprises, market analysts said. And the little surprises were positive for the market.

The report talked about strong growth and tight labor markets, which threaten the bond market with accelerating inflation, but that has become a familiar refrain,

Warburg Dillon Read

economist Jeffrey Palma said. More important, Palma said, were the observations that "the pace of wage and salary increases did not appear to be accelerating generally," and "prices appear to be mostly steady at the retail level."

"They found isolated cases by industry or region, but there's nothing broad-based about any of this," Palma said. "Nothing's flashing warning signs that the general economy is suffering from wage or price pressures that haven't yet been picked up by the official statistics."

Still, there was no discernible market reaction to the Beige Book, which was released at 2 p.m. EST. Much of today's activity was related to corporate new issues,

Prudential Securities

co-head of government bond trading Scott Graham said. "The only thing going on is hedging and unhedging," he said, referring to the process by which underwriters of corporate new issues inoculate them from falling prices, by establishing and then unwinding short positions in the Treasury market.

In today's largest corporate deal,

Procter & Gamble

(PG) - Get Report

sold a $1 billion five-year global note.

Graham doesn't expect much from the market for the rest of this year, but is bearish about the new year. "The market's way overbought and ahead of itself," he said. With the economy strong and the Fed still in tightening mode, two-year notes trading at a yield around 5.95% "are still a little expensive. But you're not going to get any satisfaction being short till year-end." He expects the long bond's yield to hit 6.50% by mid-February.