Bonds Remain Brittle Ahead of GDP Revision

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With thin volume and thinly staffed desks, the Treasury market doesn't have a lot of ballast to it these days. A puff of air, and it can shift course.

Take Tuesday's trading. Overnight the German government released a six-month annualized West German

consumer price index

that showed an increase of 2.3%, sparking fears that the

Bundesbank

would raise interest rates and sending the dollar running for cover. A bad set-up for bonds.

Then July

durable goods orders

came in with a decline of 0.6%, basically in line with estimates. August

consumer confidence

followed, coming in at 129, above consensus expectations of 126.5.

But before you could say, "Put it all in gold, Hatty," bonds came back.

"There was nothing but strong reports, nothing but bad fundamentals for bonds, but we managed to climb higher on rumors of Asian buying," says Patrick Dimick, Treasury market analyst at

UBS Securities

. A puff of air, and they skittered into the black. The 30-year Treasury bond closed up 7/32 at 96 12/32, dropping the yield to 6.66%.

***********************

Wednesday looks like it could bring more choppy trade. With only the five-year note auction at 1 p.m. EDT to drive it, and with the desks once again thinly staffed in the late-summer lull, the Treasury market will likely pull up the centerboard and go where it will.

Much of the day may be spent fretting about Thursday's revised second-quarter

gross domestic product

figures. Many traders are worrying about a sharp upward revision. The late-June reading on the second-quarter GDP showed an increase of 2.2%, but recent statistics that show a dropping U.S. trade deficit have economists concerned that that preliminary number was far too rosy.

"We're going to get a GDP number that's not going to show any slowdown in the second quarter," says Bob Brusca, chief economist at

Nikko Securities

.

"It may show the

Fed

that there never was an economic slowdown," says Tom Juterbock, head of U.S. government trading at

Morgan Stanley Dean Witter

. "We could see the economy on a 1997 growth path of 4%."

The GDP nervousness reminds UBS Securities' Dimick of the July

retail sales

report, where so many rumors of a high number circulated that an in-line number was met with relief.

"There are so many horror stories going around that the bar has been raised," he says. "There's such a hyped degree of consciousness that a lot of bad news has been priced in."

Wednesday's numbers

(times EDT):

Treasury auction

(1 p.m.): $11.5 billion five-year notes go on the block; $10.535 billion maturing.

ABC/Money Magazine Consumer Confidence Index for August

(6:30 p.m.).