Bond Market's Fit Arrested by Nasdaq's Slide

The news that the economy grew at a significantly faster-than-expected pace during the second quarter, according to the government's initial estimate, whacked the Treasury market today, but the selloff in stocks helped brake the fall in bond prices.

Based on the economic data, traders factored in somewhat higher -- but still less than even -- odds that the

Fed will hike interest rates again at its next meeting on Aug. 22.

The benchmark 10-year Treasury note ended down 8/32 at 103 10/32, lifting its yield 3.4 basis points to 6.038%. Shorter- and longer-maturity issues fared somewhat better. The 30-year bond fell 4/32 to 106 20/32, lifting its yield a fraction of a basis point to 5.781%.

At the

Chicago Board of Trade

, the September

Treasury futures contract fell 7/32 to 98 23/32.

The catalyst for the move was the advance second-quarter

GDP

(

definition |

chart |

source

) report. It said the economy grew at a 5.2% rate. Economists polled by

Reuters

had forecast a 3.8% pace. Bond investors hope for slower growth because of the risk that the current pace will cause inflation to accelerate.

The bond market took some comfort from the composition of the report. Consumer spending, the largest component of GDP, grew at a 3% pace in the second quarter, down from 7.6% in the first. Meanwhile, inventory investment, which can create a drag on future growth, added a percentage point to the second-quarter growth rate, after having subtracted 1.8 percentage points from the first quarter's.

But, calling this analysis "not entirely reassuring,"

Barclays Capital

economist Henry Willmore pointed out that the consumer-spending slowdown was due in large measure to a 15.3% drop in motor vehicle sales, after a 27.8% gain in the first quarter. Generous discounting by carmakers during the first quarter "caused many consumers to simply move up their purchases by a few months," Willmore noted.

The 10-year Treasury dropped as much as 18/32 on the GDP news, which prompted traders of

fed funds futures to discount 38% odds of an August rate hike by the

Federal Open Market Committee, up from 30% on Thursday.

Some of the damage was repaired, however, as the

Nasdaq Composite Index

fell apart, threatening to do some damage to the economy.

"The lesson of the last six months," said Bob Barbera, chief economist at

Hoenig

, "is that if there are any big surprises in the economic data, the Nasdaq steals the bond market's thunder. You get very counterintuitive responses out of the Treasury bond market because of the much more pronounced responses out of the Nasdaq."

Why the Nasdaq and not one of the other major stock proxies? "Because this is a tech boom financed by the equity market," Barbera said. "The best indicator of pressure on the boom is the Nasdaq." Ironically, he said, if today's GDP report has a message, it's that "reports of the boom's death have been greatly exaggerated."

Also worth considering,

Banc One Capital Markets

senior financial economist Anthony Karydakis said, is that the GDP report is a backward-looking release. Many bond market participants are still hopeful that the July

employment report due out next Friday will confirm that growth is indeed slowing and seal the case against any additional rate hikes, Karydakis said. In any case, he said, the July jobs report "in the eyes of most participants has the potential to settle conclusively the issue of what the Fed will do on August 22."

Still, the damage to the market was significant, particularly from a technical perspective, a trader at a primary dealer firm noted. Specifically, he said, 10-year Treasury futures traded at a new low for the week. "It would be very unusual in a good market for that to happen," he said, adding that chartists interpret the price action as "a warning signal that a top is in or near."

Economic Indicators

In other economic news, the

Consumer Sentiment Index

(

definition |

chart ) rose to a final 108.3 in July from 106.4 in June.

Currency and Commodities

The dollar gained against the yen and the euro. It lately was worth 109.53 yen, up from 109.16. The euro was worth $0.9230, down from $0.9317. For more on currencies, see

TSC's

Currencies column.

Crude oil for September delivery at the

New York Mercantile Exchange

rose to $28.20 a barrel from $28.02.

The

Bridge Commodity Research Bureau Index

rose to 219.59 from 219.05.

Gold for December delivery at the

Comex

fell to $284.20 an ounce from $284.80.