Bonds Rebound From Yesterday's Collapse

Oil and other commodities are helping as the long yield eases back under 6.60%.
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The Treasury market is making up some of yesterday's lost ground, getting some assistance from falling oil and commodities prices. But strategists say the market's tenor remains negative, especially with important economic reports looming, such as Friday's December

employment report

.

For today, traders are buying bonds, seeing an opportunity after yesterday's selloff pushed yields to their highest levels in more than two years.

"Yesterday was one of the worst down days in a year," said Mike McGlone, vice president in trading at

Aubrey G. Lanston

. "It was done on thin volume, and traders knew which way they could push the market and they did. So today's a bit of a snapback."

The market's also gotten a bit of a lift from reports that

President Clinton

will renominate

Alan Greenspan

for another go-round as

Fed

head. Lately, the 30-year Treasury bond was up 21/32 to 94 8/32. The yield dropped 6 basis points to 6.57%.

The market: Join the discussion on

TSC

Message Boards.

The price of crude oil dropped below $25 a barrel today for the first time in more than a month. February oil futures were lately down 75 cents to $24.85. The

Bridge/Commodity Research Bureau Index

was also lower, dropping 4.10 to 202. Lower commodity prices make bond investors more comfortable that inflation is not a threat.

Today's rout in the stock market has been a mild positive for bonds, as some sectors, such as banking, are starting to take heed of higher interest rates. (

TheStreet.com

discussed this trend in a story

yesterday.)

Yesterday's sell-off was an expression of the market's fear of more Fed rate hikes. However, some believe the selling has gone too far. Two-year notes yesterday yielded 6.40% and are currently trading at 6.31%, which suggests the market is prepared for a 50-basis point hike to push the fed funds rate to 6% from its current 5.5% targeted rate. The

fed funds futures

contract traded on the

Chicago Board of Trade

is currently pricing in one rate hike to 5.75% and putting 65.5% odds on a hike to 6%.

Bill Hornbarger, fixed income strategist at

A.G. Edwards

, believes recent activity is consistent with how the market's behaved in the weeks before a Fed meeting. "Bonds sold off, built in the bad news, and then rallied into the meeting," he said. "Then they sold off again afterwards," after realizing that the Fed might not be done raising interest rates. The question for the market, he said, is whether this hike will be the last one.

Today's only economic release was the November

construction spending

report. Construction spending rose 2.6% in November, far outpacing economists' expectations for a 0.2% rise. The rise follows a revised 0.1% decline in October, and three straight months without a gain.

With interest rates rising the way they have been recently, perhaps

Mets

un-slugger

Bobby Bonilla

should have

held out for a better deal. The outfielder, released by the team yesterday, has agreed to defer this year's $5.9 million salary. Instead, the money is being escrowed, which will earn 8% annually. He'll start seeing his money in 2011, when he'll be paid $1.19 million a year for 25 years. Maybe Bobby Bo didn't realize there's a Fed meeting coming up.