Today's trading action was virtually indistinguishable from yesterday's. It started off poor, became mildly interesting then drifted along pleasantly until one was lulled into thinking positively.
The Treasury market was hit hard in the morning after the release of another astounding economic report, but it took solace in the positive inflationary data contained within that release.
Once the bond market recovered from the lows, it continued to trade higher in a steady and deliberate manner. The action was largely technical, partially motivated by index investors extending the duration of their portfolio for the end of the month. Lately the 30-year Treasury bond was up 6/32 to trade at 102 12/32. The yield fell to 5.09%.
Expectations as reported by
released its advance report on fourth-quarter
gross domestic product
, revealing growth of 5.6% for the quarter. Bonds declined more than one half of a point as a result, even though economists warned that some of the growth was due to fleeting strength in areas such as government consumption, up 4.1%.
The GDP report also included double-digit increases in housing investment, nonresidential fixed investment and exports, all of which are likely to decrease. The exports increase was particularly solid, up 18.8% for the quarter. In addition, government consumption rose 4.1%, a jump that is sure to be fleeting.
"It's curious that the bond market is going to end the day up in spite of a stupendous number for the fourth quarter and a stupendous year in 1998," says
chief economist Ken Mayland. "If anything, in the GDP report, the bond market focused on the inflation indication."
The chain-weighted implicit price deflator rose 0.8%, an indicator that inflation has been held in check despite the strength in the economy. This was the lowest reading for this figure since the first quarter.
From a trading perspective, the lack of a full-fledged equity rally helped. Without the stock market to take the interest out of the bond market, bonds looked a little more attractive, even though the quarterly refunding details are to be released next week. Generally the market trades a bit wider in anticipation of the quarterly refunding, as investors attempt to widen yields to get a cheaper price on the new bonds.
"It has to be more technical in nature," says
Thomson Global Markets'
analyst Ken Logan. "I don't think we're seeing full participation in the market. There's pretty thin conditions; we have a reduced audience trading amongst themselves."
Yeah, it's thin: Tracker
said volume was 11% lower than an average first quarter Friday. Volume was strongest in the morning between 8 a.m. and 10 a.m., when the GDP report was released.
reported this morning that some Fed officials, in hindsight, think they may not have needed a third interest-rate cut last year. Coupled with the morning GDP figure blasting across television screens, the report painted a somewhat ominous picture of the future: lots of rate hikes, high stock prices, more inflation, dogs and cats living together -- in short, mass hysteria. No wonder bonds fell.
Then rationality crept back into the market -- helped along by the favorable inflationary indicators within the GDP report, as well as yesterday's fourth-quarter
employment cost index
figure, which came in at 0.7%, lower than the 0.9% increase expected. Add in still-low commodity prices and a strengthening dollar against the yen, and little reason remains for the bond market to sell off, that is, until there are clear signals from the Fed that another tightening is necessary.
"We're not seeing the impulsive participation by portfolio types who used to trade these numbers," Logan says. "They're saying, hey, we've been stuck in a trading range; we'll likely stay in the range."
Michael Fields, who manages $5 billion in fixed-income at
in Dallas, agrees. However, his long-term view is that bonds will trade lower due to the positive inflation outlook and the belief that growth will not sustain itself here while the rest of the world is fighting off recessions.
"We're reasonably bullish on bonds at these levels," he says. "There may be some temporary backups -- but ultimately over the next 18 months we think we'll see the long bond at 4.75%."
Chicago purchasing managers index
threw a spanner in the works, coming in at 47.1, way below the 50.2 consensus and down from the 51.1 December figure. Generally this report is considered a pretty good predictor of the
North American purchasing managers index
, or NAPM, released next Monday. However, the
Philadelphia Fed index
, another good barometer for the strength in the NAPM, regained its footing in the last two months. The prices paid series of the index rose to 35.4 in January from 33.8 in December; however, this trend can be explained as a bouncing off the lows, underlining the lack of pricing power in that regional economy.
Expectations as reported by