Bonds Rattle Around After Jobs Report

But the absence of a strong rally on a bond-friendly jobs report indicates that investors are more worried about inflation and don't find bonds attractive at these levels.
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In a wild morning, bonds rallied sharply on the release of the April

employment report

, and then got slammed by large sellers in the cash and futures markets. However, that selling took place in a short time period, and the market has since turned back around, slowly moving higher. But the absence of a strong rally on what many consider a bond-friendly jobs report indicates that investors are more worried about inflation and simply don't find Treasury bonds attractive at these levels.

"I don't think the market is really focused on that

the jobs report right now," said Ken Logan, managing analyst at Thomson Global Markets. "My view is, there's been a shift in psychology along the lines of what

Fed

Chairman

Alan

Greenspan

spoke of

Thursday, in that we have to be on guard for inflation pressures."

Just after the report's release, the 30-year Treasury bond rose as much as 28/32. Large sellers erased those gains, knocking the bond 13/32 into negative territory for the day. Lately the 30-year was up 7/32 to 92 18/32. The yield dipped to 5.78% from yesterday's 5.80% close.

Nonfarm payrolls

grew by 234,000 for the month of April, compared with the 230,000

Reuters

consensus estimate. This was good news for the bond market, which was nervously preparing for the worst after a rumor circulated that the

Labor Department

would report a gain of greater than 300,000. Just as importantly,

average hourly earnings

rose only 0.2%, compared to the 0.4% consensus. On a year-over-year basis, the increase in average hourly earnings is now 3.2%, compared to 4.4% at this time last year.

But the nearly one-point gain evaporated in a half-hour, which shows how vulnerable bonds are to selling pressure. Recently, trading volume has been at its strongest when the market sells off, as investors have adjusted their inflation outlook to take account of this year's rebound in oil prices and improvement in sentiment in cyclical stocks, said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. Investors have preferred to buy agency and corporate debt, which carries a higher yield, rather than fight for steadily decreasing Treasury supply. The market also apparently took Greenspan's

address to heart, where he expressed concern over the labor market's tightness and referred to last year's fall in oil prices as a "one-off event."

Sources said several large dealers sold between 8,000 and 10,000 June 30-year contracts in the futures market and there were large sellers of bonds in the cash market. Over 300,000 bond contracts changed hands on a daily basis during April on the

Chicago Board of Trade. The June bond contract hit its low of 118 10/32 at 8:59 a.m. EDT, about the same time the cash bond hit its bottom, and was lately trading at 118 26/32, up 3/32.

"It doesn't look like broad-based selling this morning," Crescenzi said. "The main point is that there are no buyers either -- buyers have yet to materialize on these downticks."

Since the 9 a.m. EDT trough, the market has moved higher. But with two key inflationary figures due next week -- the April

Producer Price Index

and

Consumer Price Index

-- the recovery has been tentative. Both indicators are forecast to rise 0.4%, more than in recent months, due to the rise in crude oil prices.

"Higher oil prices are going to start kicking into the PPI and CPI," said Mickey Levy, chief economist at

Bank of America

. "The market has upped its inflation expectations a lot, and it suggests the market is a bit nervous."