"I guess I'm going nowhere." -- Luke Skywalker,

Star Wars

Stocks took it on the chin this afternoon, but that doesn't mean the bond market is celebrating. The

Fed's

bias toward raising interest rates has bonds in a vice, so the market didn't rally on the equity weakness. The declines in equities, as well as commodities, did help lift bonds off the morning lows, when two suprising economic releases knocked the Treasury market down.

"There's a lot of event risk, like for a strong

Consumer Price Index

or another strong

nonfarm

payroll

report," said Larry Berman, fixed income strategist at

CIBC World Markets

. "There's no reason to buy, but there's just not a reason to sell the market today, so the market grinds" higher.

Of late, the 30-year Treasury bond had eked out a 3/32 gain to 92 28/32. The yield was down 1 basis point to 5.75%.

Bonds turned positive when the major equity indices swooned. Today the

Dow

lost 123 points, while the

Nasdaq Composite Index

finished down 73 points.

The stock market seems to be taking the Fed's move to a tightening bias harder than bonds, even though other factors are also weighing on equities. But the Dow has lost 2.8% of its value since last Tuesday's close, the day the Fed adopted a bias toward hiking interest rates. The Nasdaq has lost 6.9% in that time.

Stock investors are concerned about the prospect of higher rates, especially if the bond begins to move toward the 6% level. Higher rates make equities less attractive when viewed against less-risky Treasury bonds, and it also increases companies' borrowing costs. At this point, the latter is less of a concern since rates are still considered very low on a historical basis.

Commodities finished the day lower, providing some support for the bond market. The

Commodity Research Bureau's

index fell to 187.5, while gold fell to 270.8, a 20-year low.

The disparity between the weakness in commodities and the anecdotal evidence of global economic recovery serves as a counterpoint to the 0.7% rise in the April CPI. Low materials prices decrease spending costs for companies, allowing them to hold costs down.

"Inflation is beginning to accelerate, but the bond market overshot the mark when it was nibbling at 5.9%," said Diane Swonk, deputy chief economist at Bank One. "We're still in a gray area here."

The bond market was surprised this morning by the strength in

existing home sales

. Resales of homes fell 3.3% in April on a seasonally adjusted annual basis, but March's figure was revised upward by 7.3% to a new one-month record rate of 5.42 million homes. So, April's decline to 5.24 million isn't heartening to those expecting a slowdown in the housing sector.

"The housing report points to the probability that the economy will continue to grow well above the Fed's desired pace," said Joel Naroff, economist at

Naroff Economic Advisors

.

The

Conference Board's

index of

consumer confidence

rose to 135.8 in May from a revised 134.9 in April. This is also considered a negative, although the report probably came too early for the Fed's adoption of a tightening bias to impact this survey. But the index points to continued strength in spending and in job security, which should fuel demand in the housing and service sectors.

"There's a reason why the Fed changed their bias, and it doesn't appear any of the things the Fed is concerned about have alleviated themselves," said Tom Ruff, vice president in proprietary trading at

Daiwa Securities

.

If more key data suggests that inflation is rising, the Fed will be forced to hike rates, which would jolt the bond market higher. That's going to take a few more days of waiting, however, until next week's May employment report and the May CPI two weeks later.

New orders of

durable goods

for April will be released tomorrow. The market is expecting a 0.3% increase after the 2.9% jump last month. While this report doesn't provide direct clues on inflation, the continued recovery in the manufacturing sector is more evidence of economic strength.