Bonds Absorb Stock Market Outflows

But only the long ones benefit, as the Fed outlook traps the short end.
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What by rights ought to have been a quiet day in the bond market -- a Monday (historically the slowest day of the week) with no economic indicators -- is not, thanks to the dramatic selloff in stocks at the open.

"If it weren't for stocks, it would be a typical quiet Monday," said David Ging, Treasury market strategist at

Donaldson Lufkin & Jenrette

. "Now we've got stocks to watch."

The selloff, which reversed course after about 20 minutes, brought buyers into the Treasury market. But as stocks pared their losses, bonds have pared their gains. The benchmark 30-year Treasury, up as much as 17/32 at 9:13 a.m. EDT, lately was up 11/32 at 97 7/32, trimming its yield 2 basis points to 5.44%.

Bonds rallied before the open in stocks based on the weakness of the

S&P 500

futures contract traded on the

Chicago Mercantile Exchange

, which traded down as much as 28.2 points overnight. It was lately down just 7.7 points.

Stocks' recovery "has sort of taken the luster off of bonds here," said Marcello Frustaci, trader at

Daiwa Securities America


Even so, the long bond's yield is at its lowest level since Feb. 23.

The two-year Treasury note, however, a proxy for the short end of the yield curve, is lower on the day, lately down 1/32, lifting its yield from 4.87% to 4.89%. The difference in yield between the long bond and the two-year, a popular measure of the slope of the yield curve, has narrowed from 59 basis points to 55, continuing a trend that's been in place since the beginning of the month.

Money that flows into the bond market is flowing disproportionately into the long end of the yield curve because, with the


seen as likelier to raise interest rates than lower them in the months ahead, investors aren't willing to accept two-year note yields only slightly higher than the 4.75% fed funds rate. For that reason, Ging said, "as the market rallies it's going to be harder and harder for the front end to keep up."