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It's all about acronyms in the bond market today. The ECI, the GDP, the ECB -- all conspired to keep things quiet as traders look forward to events tomorrow.


Treasury Department

sold $12 billion of two-year notes this afternoon, but the response was tepid because of the market's focus on tomorrow's reports, especially the quarterly

Employment Cost Index.

The ECI is considered one of the most important indicators of wage inflation, and the importance of tomorrow's 8:30 a.m. EDT release kept many on the sidelines, contributing to the poor auction. With most economists expecting at least a quarter-point increase in the fed funds rate at the May 16

Federal Open Market Committee meeting, traders are wary of buying short-term debt, which can have a severe reaction to changes in

Fed monetary policy.

Lately the benchmark 10-year Treasury bond was down 2/32 to 102 19/32, dropping the yield to 6.142%, down 0.6 basis points. The 30-year bond was up 5/32 to 104 4/32, driving the yield down to 5.952%, up 1 basis point. The five-year note was unchanged at 97 31/32, yielding 6.39%.

"It seems that there's almost a 100% probability -- let's call it 99% -- that they are going to tighten on May 16," said Maryann Hurley, vice president in trading at

D.A. Davidson

in Seattle. "That's going to bring the funds rate to 6.25%. The 6.484% level is on the expensive side. I'm surprised they were able to get it done at this level."

The Treasury sold $12 billion in notes at a yield of 6.484%. The poor performance, as measured by the bid-to-cover ratio, pressured the market late in the day, as it underscores the lack of confidence among bond investors. The bid-to-cover ratio was 2.31 to 1, which is better than the recent average, but low when considering the Treasury used to sell $15 billion at each two-year auction.

"Since the debacle in the

Nasdaq began, and especially since the

Consumer Price Index report on April 14, the two-year has been weakening," said Tony Crescenzi, chief bond market strategist at

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Miller Tabak

. "The Fed's been orchestrating its message to warn the markets that they'll continue with this rate hike campaign... and that message has hit home with the short end, which has done badly."

Economists as polled by


are expecting for a 0.9% increase in the Employment Cost Index in the first quarter, after a 1.1% increase in the fourth quarter last year. Wage costs have been increasing at a slow, steady rate. They're rising 3.4% year-over-year, same as at the end of 1998, although that's an increase since the 1996-1997 period. However, they haven't, at least the way the government calculates it, exploded.

"Slowly but surely,

inflation is beginning to grind into the compensation measures," said Brian Jones, economist at

Salomon Smith Barney

, who expects a 1.1% increase in the ECI, which would put the year-over-year rate on the figure at 4.2%, the highest in about eight years.

A huge increase in the ECI could make the market more worried about a 50-basis-point hike in the

fed funds rate, something for which the bond market's been on guard since the April 14 CPI release.

However, Jones doesn't think it's going to happen. The first-quarter

gross domestic product figures are released tomorrow. The consensus is for growth of 5.9% for the quarter, exceedingly strong. Economists are also expecting a 2.2% increase in the implicit price deflator, the report's inflation component. Jones thinks this figure could come in below 2%, and he said that doesn't justify a 50-basis-point hike.

"The inflation numbers

like the CPI coming later in the month are going to be tame," said Jones. "That's not the sort of numbers you go 50 on."

Today's only major economic release was the durable goods report. As has become customary with economic data, this report was stronger-than-expected. The bond market held steady, however, because this figure doesn't command the attention that tomorrow's reports will.

Durable goods orders increased 2.6% in March, besting the economic consensus for a 1.8% increase, as reported by


. February's decline was revised to a 2% drop from an original 2.7% drop, underlying the continued strength in the manufacturing economy.

Excluding transportation orders, durable goods rose 2.8%, after a 0.5% increase in February, revised upward from an original 0.7% decline. Last month's drop was chiefly affected by the


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strike, and therefore a rebound was expected this month.

Somewhat less important for the market tomorrow is the

European Central Bank

meeting. It's a toss-up as to whether the ECB raises its short-term lending rate, which currently sits at 3.25%.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 106.25 yen, up from 105.79. The euro was worth $0.9233, down from $0.9240. For more on currencies, please take a look at



Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

fell to $24.67 a barrel from $25.33.


Bridge Commodity Research Bureau Index

rose to 210.75 from 211.95.

Gold for June delivery at the


fell to $277.1 an ounce from $279.80 yesterday.