Bonds Rise for a Change, Feeding on Stock Weakness

The ongoing troubles in Brazil are helping to pressure U.S. stocks, sending money into Treasuries.
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Clutching a mixed bag of economic data, the Treasury market is headed higher today, driven mainly by Brazil-induced weakness in the stock market.

The benchmark 30-year bond lately was up 14/32 at 101 19/32, dropping its yield 3 basis points to 5.14%. That's the first improvement in four trading sessions.

Expectations as reported by

Reuters

With the

Bovespa

falling for the first time since last week's Brazilian government decision to let the currency float freely (the index was lately down 4.2%), and the real continuing to plummet, the

S&P 500

is under pressure today, and that's benefiting bonds.

"The focus is still on the equity markets, especially as it relates to the Brazil situation," said John Youngdahl, money-market economist at

Goldman Sachs

. "It's a big turnaround there, with the stock market weakening and the real's slump. That's causing, or is at least tied to, the weakness in the stock market, so bonds are reacting positively. It's still very much an inter-market story."

All eyes are on Brazil as market strategists try to assess the likelihood that economic weakness there will spread to other emerging markets, threatening profit growth in the U.S. and enhancing the appeal of the safe, liquid Treasury market.

"That's simply the trade," said Richard Bodkin, senior government trader at

First Chicago Capital Markets

. "We've got a little bit of supply next week and then a couple of weeks later, but we will mirror the Brazilian and U.S. equity markets."

On the domestic economic front, the trade deficit widened a bit more than expected in November, to $15.5 billion from $13.6 billion. After posting gains in September and October than many economists said were unsustainable given the lack of purchasing power in Asia, exports dropped, and imports surged.

But at the same time, the

Philadelphia Fed Index

for January surged to 12.4 from a revised -0.8 in December. The regional manufacturing indicator, which sometimes forecasts movements in the

Purchasing Managers Index

, the leading national manufacturing indicator, now appears to have bottomed at the end of last year. A manufacturing rebound would presumably avert a more widespread economic slowdown.

The

Labor Department's

weekly tally of

initial jobless claims

slipped to 346,000 from a revised 360,000, but not counting the strike-inflated summer numbers, the four-week average rose to its highest level in nearly three years, 368,000. "There's some straws in the wind that the labor market may be turning weaker," Youngdahl said, "but it's very difficult to tell at this time of year," when weather can distort the counts.