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Bonds on Hold in Advance of Auction

Even today's strong first-quarter productivity report failed to shake things up.

The fixed-income market is in vigil mode this morning, as bonds were little changed in advance of the first leg of the

Treasury Department's

quarterly refunding. Even today's strong first-quarter


report, friendly from an inflation standpoint, failed to shake things up.

"The auction is a bigger event today than the productivity report," said Charles Reinhard, market strategist at

ABN Amro


Lately the 30-year Treasury bond was down 6/32 to trade at 92 4/32. The yield rose a basis point to 5.81%.


Labor Department

said productivity rose 4% during the first quarter of 1999, while unit labor costs rose only 0.3%, both better than what economists were expecting.

Put simply, these figures mean that producers' labor costs are being offset by rising productivity. It's a signal that inflation should remain low, and it's good for the bond market. Consensus estimates were for a 3% increase in productivity and a 0.5% rise in unit labor costs, according to



But the market's reaction to this news has been underwhelming. Participants are awaiting the Treasury's sale of $15 billion in five-year notes at 1 p.m. EDT. Lately the five-year bond was yielding 5.38%, a 29-basis-point rise since the April 29 close at 5.09%. The market usually sells in anticipation of an auction to get a higher yield, but that got an added boost by the increased worry over rising inflation. These fears led to a broad-based selloff last week, so it made these new securities more attractive in a fast way.

"We had a nice selloff last week. So far we seem to be pretty close to Friday's levels and if the market can get a bit more of a concession it will like

the auction," said Reinhard. A concession refers to a slightly higher yield for the new five-year note.

Looking past the refunding, which concludes tomorrow with a $12 billion sale of 10-year notes,

Lehman Brothers

economist Joel Kent said today's report should help allay the market's inflation fears. Productivity rose 4.3% in the fourth quarter last year and unit labor costs fell 0.4%, so while this marks a deterioration from that quarter, a 4% productivity rate is still considered historically high, he said.

Kent said today's data viewed alongside the first-quarter

employment cost index

, released two Thursdays ago, and the April


report, released Friday, should be enough to stay the Fed's hand at the May 18

Federal Open Market Committee

meeting. The ECI rose just 0.4% during the first quarter, and the

employment report revealed only a 3-cent increase in average hourly earnings, both signals of low inflation.

"I don't think the Fed needs a bias to tighten," Kent said. "There hasn't been a major shift in sentiment at the Fed; the risks are to the upside but not so significant that the Fed needs to imminently raise rates."