Bonds Follow European Counterparts Higher

The pullback in stocks is adding to the bullish tone.
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Bond prices are moderately higher today following a rally in the European bond market and as stocks surrender some of

yesterday's gains. A coupon pass by the

Fed

in which the bank bought about half a billion of Treasuries maturing from 2003 to 2007, adding liquidity to the banking system in order to keep the fed funds rate on target, also gave the market a boost.

With no market-moving economic indicators on the daily calendar, the benchmark 30-year Treasury bond was lately up 28/32 at 95 30/32, dropping its yield 6 basis points to 5.53%. Volume continues to be extremely light, however. By 10 a.m. EDT $15.3 billion of Treasuries had changed hands, 34.1% below average for a second-quarter Tuesday, according to tracker

GovPX

.

Low volume isn't surprising in market conditions like these. The long bond has traded in a narrow range between 5.50% and 5.70% for the last six weeks, and is showing no sign that it might break out. The basic reason,

Stone & McCarthy Research Associates

Treasury market analyst John Canavan said, is that recent economic data suggest that the Fed is happy with interest rates where they are. "Till we see something that changes that, there just isn't any reason to do anything," he said. With the

Producer Price Index

the only item on the weekly calendar with the potential to make things interesting, a surge isn't likely this week.

The chief reason for today's rally, Canavan said, is a rally in the European bond market, where yields on most benchmarks shed about 5 basis points today. Today's session was Europe's first since Friday's release of the March

employment report

, which triggered a more than 1-point rally in the U.S. bond market. "It was their first chance to react to the employment report," Canavan said, noting that after the European rally, the U.S. market "opened with a better tone this morning, and we've held onto it."

The analyst noted that so far this month is shaping up like last month, when the release of the employment report at the end of the first week triggered a rally on light volume that ultimately gave way to a fresh bout of pessimism as the next jobs report release date drew nearer. The only difference: the rally "seems to have even less conviction this time," he said.

The stock market action may also be supporting bond prices, said Charles Parkhurst, head of government bond trading at

Salomon Smith Barney

. "From an asset-allocation standpoint, stocks are at their highs while bonds are way, way, way off their highs," he said. "So you could argue that we might see some rotation out of stocks and into bonds."

The facts that key support levels have held lately (indicating that investors see value in bonds at the low end of their recent range), inflation's stayed low, and the Japanese economy continues to languish are also bullish for bonds, Parkhurst noted.