Alan Stays in Neutral, and Bonds Stay Down

Trading is seen remaining in a range.
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And everyone was so worried.

Alan Greenspan's

appearance before the

House Ways and Means Committee

this morning had little effect on the bond market's direction. The stock market decided that his remarks were mildly positive for equities, and bonds shifted lower.

The

Fed

chairman's balanced remarks had the affect of squeezing those that hoped he would throw more cold water on the stock market. The bias for two-year notes now that the international situation is perceived as somewhat more stable is slightly negative, especially with a two-year note auction coming next week.

The two-year note is currently trading at 4.70%, still lower than the federal funds short-term lending rate.

The five-year note is also yielding less than the 4.75% funds rate and the 10-year note is just above the funds rate. Greenspan's remarks were less strident than both the bond and stock market were expecting. With a neutral Fed and the market facing impending supply -- which includes a quarterly refunding next month -- bonds look slightly rich, according to economists.

"We're probably going to be range-bound and a little negative," said David Ader, director of fixed income at

Thomson Global Markets

. "But in the markets' price action, we're seeing positions revealed -- not a directional conclusion."

When the market is ensconced in a range, it frequently reacts against the stock market. The Fed chair's comments regarding asset prices was a departure from recent emphatic statements by other Fed officials questioning the valuation in the stock market.

"While asset values are very important to the economy and so must be carefully monitored ... they are not themselves a target of monetary policy," he said. "We need to react to changes in financial markets, as we did this fall, but our objective is the maximum sustainable growth of the U.S. economy, not particular levels of asset prices."

This statement provoked the greatest response from the equity market, and as a result sent bonds down.

"This is a slight departure from their recent public posture," said Dan Seto, economist at

Nikko Securities

. "From what I've seen in his testimony so far there's not enough of a singular tone to guide the markets lower."

Expectations as reported by

Reuters