Bonds Can't Hold Early Gains, Drift Lower

Dearth of economic data caused a sleepy session.
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Treasuries were essentially unchanged today, as the market gave back most of this morning's early gains in what strategists described as a quiet session.

The early strength was a continuation of the market's rally Friday off the in-line

employment report

, but a sagging dollar, stronger oil prices and general malaise put the market back where it started.

Without a major economic release until Friday's

Producer Price Index

, traders said they expect more days like this during this week. Tracker

Gov PX

reported volume down 11% when compared to the average Monday this past month, but traders even described it as less active than that.

"Europe and Asia are already starting to close up for the year," said Vincent Verterano, head government trader at

Nomura Securities

. "Our customers look like they're ready to shut down."

Lately, the 30-year Treasury bond was up 7/32 to 98 11/32. The yield fell to 6.25%, down 1 basis point. The 10-year note gained 6/32, dropping the yield 2 basis points to 6.15%.

The 30-year bond was up as much as 10/32 in the morning, a continuation of Friday's relief rally after hearing that labor markets did not tighten in November. The

unemployment rate

remained steady at 4.1% and

average hourly earnings

increased just 0.1%, which means wage inflation is still under control.

The market closed up nearly a full point Friday, but one investor said bond participants were alleviating an oversold market, not starting a trend.

"I don't believe employment data was all that positive for the market," said Richard Schwartz, senior vice president at

New York Life Asset Management

. "Largely, what was happening was the market had gotten a bit oversold, and subsequently in the face of decent data, rebounded from the oversold condition to trade better."

Treasuries pared back their gains, because the unemployment data doesn't show a loosening in labor conditions in the slightest. It also can't provide the market with any evidence that the housing market or consumer demand is slowing. Fed officials still believe that wage pressures will arise if the labor markets remain in its current tight state. To the market, that's a message that the Fed might have more interest rate hikes in its pocket.

The market was also affected by the rally in crude oil. The January crude oil contract traded on the

New York Mercantile Exchange

rose 79 cents to $26.60 today after declining last week. But John Blough, chief investment strategist at

Fahnestock

, found it encouraging that bonds didn't decline significantly against this rise in oil.

He believes crude oil prices have peaked, and as those prices decline, the bond market will receive some mild support. "I don't think the market is married to crude oil, but if it shows weakness

bonds will benefit from it," Blough said.