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Bonds Leap on Friendly Data and Whispers About Buffett

But volume was light and the CPI is waiting in the wings.

The bond market rallied strongly today on friendlier-than-expected economic reports and rumors that

Warren Buffett

was a buyer of long Treasury zero-coupon bonds. But volume was light, and traders are still waiting for the April

Consumer Price Index

to be released tomorrow morning before they brain the bear.

The benchmark 30-year Treasury bond ended the day up 30/32 at 92 26/32, dropping its yield 7 basis points to 5.76%, the lowest it's been in a week. The long bond's yield soared to its highest level in nearly a year, 5.83%, on Tuesday.

"I'm not surprised by the rebound today," said Ken Fan, bond strategist at

Paribas Capital Markets

. "It's a nice rally and we were looking for it. But bonds need to advance much more for people to become longer-term optimistic."

The rally happened in two stages. The first was sparked by the 8:30 a.m. EDT release of the

Producer Price Index

and

retail sales

reports, both for April.

Producer prices, a key inflation indicator, rose 0.5%, a tenth less than economists surveyed by

Reuters

had predicted they would. The bond market's obsession with inflation has deepened significantly in recent weeks, so every tenth counts. Core PPI, which excludes volatile food and energy prices, rose just 0.1%, in line with expectations.

Retail sales also rose 0.1% overall, two-tenths less than expected. Excluding autos, they rose 0.4%, in line with expectations. A stronger-than-expected retail sales report might have spread fear that the economy is in danger of overheating.

"The numbers in the morning were friendly, so there was an initial spike up, and we stayed up for most of the day, until the afternoon, then another round of buying came in," Fan said.

Someone, it appears, is making a big bet that Treasury yields put in a high last week by buying long Treasury zero-coupon bonds, a.k.a. STRIPS. Zeros are the bonds to buy to maximize your price gain when interest rates fall, and Fan says the Treasury principal STRIPS due in November 2021 have seen their yields drop by 5 basis points so far this week, including a 2-basis-point move today.

The chatter in the market was that the Treasury STRIP buyers included

Warren Buffett

, who famously disclosed $600 million of paper gains on Treasury zeros in his 1997 letter to

shareholders. Another market analyst reported getting a message from a well-connected source that spoke of a "Midwest icon buying Ps." And

Market News Service International

reported talk of a "savvy plains-state investor" doing the same thing. Translation if true: Buffett's buying zeros. The savvy plains-state investor was traveling and couldn't be reached today, a spokeswoman said.

But if Warren Buffett likes Treasuries at these levels, he's not the only one. Fan said demand was also strong today from institutional investors in long off-the-run Treasuries, which have been yielding more than 6% for most of the month. When sentiment improved today, they became ready to buy.

Still, there is plenty of sentiment that today's rally may be nothing more than a pause in what remains a long-term bear market. The bears note that volume was light today, never a good sign when prices are rising. Tracker

GovPX

saw $52 billion of Treasuries change hands, 28.7% below average for a second-quarter Thursday.

Also, from a technical perspective, the market has not yet reached a level where the bounce off the lows is convincing,

MCM Moneywatch

senior technical analyst Walter Burke said, defining that level as 120 on the June Treasury bond futures contract traded on the

Chicago Board of Trade

. It closed today at 119 21/32. "Now we're just retesting the level where we broke down from. Big deal," he said. "The next half point or so is kind of critical."

Then, of course, there's the CPI to worry about. In the overall PPI, energy prices were more restrained than many feared they would be, and the same phenomenon might keep the overall CPI in line as well,

Daiwa Securities

chief economist Michael Moran said. But the core CPI and the core PPI are very different animals, Moran said.

He expects a friendly core CPI based on the better-than-expected first-quarter

productivity

report released on Tuesday (productivity rose at a 4% rate vs. expectations for a 3% rate), and on today's 0.3% decline in non-petroleum import prices in the April

Import Price Index

.

But a hotter-than-expected core CPI has the potential to do some damage to the bond market, Moran says. "That's what's bothering people in the market. They are nervous about the inflation situation, and if they see inflation picking up, I think we'll see a negative reaction."