Bonds Manage a Slight Recovery

It might be only technical, but a bounce is a bounce.
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Somebody had to buy bonds sooner or later. Treasuries bounced off their recent lows today, buoyed by month-end index buying, after steadily declining since the


raised rates Nov. 16. The market initially weakened on strong economic news, specifically the

Chicago Purchasing Managers' Index

, but recovered as investors came into the market.

Lately the 30-year Treasury bond was up 8/32 to 97 25/32, dropping the yield 2 basis points to 6.29%.

Since today is the last day of a month in which there was a Treasury refunding, there's a significant change to bond indices, which are reconfigured at the end of the month to add in the new securities. Money managers who attempt to mimic the performance of indices, therefore, were buying today.

"There was a technically oversold condition first and foremost, which meant that coming into this morning there was a likely underlying bid for the market," said John Canavan, Treasury market analyst at

Stone & McCarthy Research

in Princeton, N.J. "And we did find support from index buying."

Canavan said today's bounce was largely technical, however, and the strength in economic data means the market will still lean to the negative. But for the day, the market wasn't torn asunder by economic data.

The Chicago PMI, a survey of manufacturing sentiment in the Midwest region of the U.S., retreated slightly, to 56.8 in November from 58.8 in October. A reading above 50 indicates expansion in the manufacturing sector; below 50 indicates contraction. However, the prices paid index, which measures what producers are paying for materials, rose sharply, to 70.9 from 65.4.

Deutsche Bank

economist Ed Yardeni wrote that the recent rise in oil prices was a probable cause for the rise in the prices paid component. Just the same, the increase causes similar worries in the bond market that a rise in the

Producer Price Index

does: that rising production costs will soon be passed on to consumers in the form of price inflation.

Energy prices, meanwhile, today retreated from their recent highs, contributing to the bond market rally. The January crude oil contract, traded on the

New York Mercantile Exchange

, closed down $1.37 today to $24.59. That's off almost $2.50 from the Nov. 22 $27.07 close, which was the highest in nine years.

"There's been a washing out of energy price pressures that were a negative for Treasuries," said Bill Sullivan, chief money market economist at

Morgan Stanley Dean Witter

. The selling "reflected an overbought environment and the prospects that Iraqis are starting to pump again."

Iraq, which suspended a

United Nations

oil-for-food arrangement earlier this month, accepted a six-month extension Saturday.


Conference Board's Consumer Confidence Index

rose to 135.8 in November, up from 130.5 in October, but the market had little reaction to this release.

The market faces more potentially unfriendly economic data later this week. The

National Association of Purchasing Management's

manufacturing index is released tomorrow at 10 a.m. EST, and November's

employment report

is due out Friday.

Economists polled by


expect the NAPM to fall to 56.3 in November from 56.6 in October. Meanwhile, the


poll shows economists are forecasting a 226,000 increase in

nonfarm payrolls

, compared with a 310,000 increase in October and a 0.3% increase in

average hourly earnings


These economic releases aren't immediately going to be cast as harbingers of an imminent interest-rate increase -- most expect the Fed to remain on hold at the Dec. 21 meeting, seeing as how it's so close to the Y2K date change. Whether there's going to be more up days for the bond market in coming weeks will depend on these reports, however.

"Where we finish December will be shaped by the tenor of these upcoming reports," Sullivan said. "If you get strength, the feeling is that you'll test the high-yield watermarks this week."