Bonds Retreat On Stock Recovery, But Not Without a Fight

Long-dated securities held onto gains, while the short end endured weakness throughout.
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Strength in the Treasury market declined as major equity indices roared back in the late morning and afternoon. But surprisingly, bonds didn't beat a hasty retreat immediately. Instead, the market held onto the gains until finally easing in the last hour of trading.

Lately the 30-year Treasury bond was up 8/32 to trade at 97 3/32. The yield fell to 5.448%. The two-year note was down 1/32, yielding 4.908%. Long bonds hung in there, partially due to a $587 million coupon pass executed by the

Federal Reserve

. The Fed purchased bonds to add liquidity to the banking system just before noon EDT. The purchases were clustered in bonds with an eight- to 20-year maturity.

Volatility was low today -- the June bond contract traded in a 13-tick range during the session. The bond contract, which closed at 122 31/32 Friday, rose as much as 13/32 before closing the day up only 3/32. Tracker

GovPX

reported volume down 9% when compared to the average first-quarter Monday.

"I think the inflation anxiety has kind of quieted down. A couple of weeks ago, when oil started screaming, you had people seriously concerned," said Ken Fan, bond strategist at

Paribas Capital Markets

. "The bond is up today versus the front end. It's indicative of a positive long-term view on the inflation front."

The market is taking an indifferent stance on tomorrow's March

Consumer Price Index

, one of the more important economic releases. Market sentiment may not be bullish just yet, but the bearish tone displayed the last two months has eroded somewhat. Recent statements from the Federal Reserve indicate they've turned more accommodative, and Friday's

Producer Price Index

report was reassuring.

"I think there's very strong conviction in the markets now that the Fed is not in play anytime soon," said Dana Johnson, director of capital markets research at

Banc One Capital Markets

. "That takes some of the volatility out of the market in terms of its potential to react to economic reports."

The overall CPI is expected to rise 0.3% in March, compared to the PPI's 0.2% rise. Excluding food and energy prices, the core CPI is forecast to rise 0.2% for the month. Core PPI was unchanged during March, but Suzanne Rizzo, economist at

MFR

, said the core CPI could be impacted by various prices not included in the PPI, such as airfares.

"The CPI might be on the high side, but 0.2% core CPI growth is nothing," said Rizzo. "It will show big growth next month due to rising gas prices, but food and energy is outside the Fed's control."

Despite the influence seasonal adjustments had on March's nonfarm payroll report released 10 days ago, the market was heartened by the meager 3-cent increase in

hourly earnings

(up only 3.6% on a year-over-year basis, lowest since July 1997). Last week's

import/export prices

report showed that non-petroleum import prices are still down 2.3% from March 1998 to March 1999, indicating that the price declines in imported goods haven't been reversed yet.

"The weakness abroad and strength of the dollar are major safety valves for us; we're continuing to import deflationary pressures," Johnson said.

Corporate supply picks up later this week, as

Associates Corp. of North America

, a unit of

Associates First

(AFS)

, will price a $1.5 billion corporate offering. Associates Corp. is the company that ostensibly "reopened" the credit markets in the fall after the

Long Term Capital Management

debacle, by selling $4.8 billion in late October.

Conoco

(COC)

is also expected in the market with a $3 billion issue.