Bonds KO'd Early

A slew of strong economic data sent the market reeling.
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You know it's a bear market when the market expects worse news than what is forecast and still gets pounded as a result. Today all three economic releases were better than expected. By the time stocks rang their opening bell, bonds were already taking a standing-eight count.

Lately the 30-year Treasury bond was down 1 11/32 to trade at 93 31/32. The yield, which closed Friday at 5.59%, closed today at 5.67%. A yield of 5.68% was reached first around 11 a.m. EST and was supported throughout the day. Since the market is anticipating another strong

employment report

Friday, there isn't much chance of a rally beforehand. The June bond contract closed today at 120 2/32, down 29/32 on the day.

"There's not going to be a respite from the strong economic data," said John Youngdahl, money market economist at

Goldman Sachs

. "If anything the figures could continue to surprise on the strong side for a little while."

Most damaging for the market was the

National Association of Purchasing Managers' manufacturing index

, which rose to 52.4 for February, the highest level for this index since April 1998. The previous eight readings fell below 50, indicating a contraction in the manufacturing sector. Other key measures contained within the index also rose, including production, new orders, and new export orders, which rose above 50 for the first time since November 1997. The last bit of info reveals that demand for domestic goods from other countries is increasing.

A notion still prevalent among investors and some strategists is that the market will turn upward again once it is finished slogging through this economic data, the granddaddy of which being Friday's jobs data. Since the Treasury is scheduled to pay down more than $100 million in outstanding debt during the second quarter, it is believed that act will cause bond yields to decline a bit.

"We tried to minimize the impact of the move higher by being in a little more defensive securities," said David Brownlee, senior vice president of

Sentinel Advisors Company

in Montpelier, Vt. "The magnitude of this move has surprised us all. We're still very constructive on bonds in the longer term, but it's hard to fight the tape in the short run."

Tucker Anthony

strategist Michael Shamosh pointed out that the lack of inflationary data in the NAPM release (the prices paid component rose to a still very low 35.9 in February) as well as other recent economic data means bonds are a good value at this point. He believes that although the

Federal Reserve

will cut rates if the inflationary outlook changes drastically, until then, "bonds are on sale."

"Inflationary expectations are not there," said Shamosh. "The Fed is getting the market to do its job. Inflation is the prime damager of bonds, not growth."

Personal income

grew 0.6% in January, bettering the 0.4% consensus estimate, while

consumption

grew 0.3%, also stronger than the 0.2% forecast. The spending increase was less than half of the 0.7% December increase, but the decrease was "well anticipated," said a comment from

High Frequency Economics'

Ian Shepherdson.

Construction spending

rose 1.6% in January, far outpacing the 0.3% expectation. December's rate of construction spending fell to 1.4% from 1.7%. Residential investment was strong once again, up 1.3%, while public construction rose 5.9%, the largest gain since 1991.

The remainder of this week's data will be somewhat glossed over in anticipation of the jobs report on Friday, though expected bearish news certainly won't help the market out any. Tomorrow's new home sales data is currently forecast at 967,000, though that data has usually surprised on the upside. The current household unemployment rate forecast is 4.3%, though Youngdahl thinks it's going to surprise.

"People are underestimating the probability of a drop in the unemployment rate" to 4.2%, Youngdahl said. "It would be a low for the expansion and it's not out of the question that you could get a bigger drop."