Bonds Slightly Higher in Lackluster Session

This afternoon's two-year auction annoucement is the lone possible source of intrigue.
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Treasuries are little changed on light volume this morning. The long bond has surrendered most of the gains it made overnight on buying related to a couple of corporate new issues, but remains higher on the day, while shorter-maturity notes are lower in price.

There are no market-moving economic reports today and none slated till next week. This afternoon's announcement by the

Treasury Department

of the size of its next monthly two-year note auction next Wednesday is the only possible source of intrigue scheduled. Traders expect another $15 billion block, but if there's a risk, it's that the government will trim the size of the issue by a billion, stoking demand for it, said Matthew Frymier, who trades the issue for

Nationsbanc Montgomery Securities

in San Francisco.

The benchmark 30-year bond was lately up 5/32 at 96 11/32, its yield shedding a basis point to 5.50%. It was up as much as 16/32 at 9:29 a.m. EDT, on buying Frymier said was related to a $200 million 5-year bond sold by

Nestle Canada

during London hours and a $400 million 10-year bond from

DuPont

(DD) - Get Report

expected to price this morning. Corporate bond pricings can create demand for Treasuries from swap desks, which assume the issuer's fixed-rate liability and hedge their risk by taking on a fixed-rate asset in the form of a Treasury security. The

Fed

helped matters by taking $867 million of short-dated bonds out of the market in a coupon pass.

Volume was especially light, however, 35.6% below average for a second-quarter Wednesday as of 10 a.m. EDT, according to tracker

GovPX

.

The fact that U.S. yields remain the highest in the universe of

Group of Seven

issuers also continues to fuel demand for Treasuries,

Aubrey G. Lanston

senior economist Bill Quan said. Except for Canada, the U.S. is the only country in the group with benchmarks yielding over 5%, and Canada's is lower, he said. "The U.S. is still relatively attractive."

Not enough, however, to redefine the range in which Treasury yields have been trapped for the better part of two months. "It's going to be like this because the consensus view is that the Fed, monetary policy, is on hold indefinitely," Quan said. "Without a surge in inflation, you're not going to get the Fed to tighten, so the Treasury market is rangebound right now."

"We get fluctuations inside the range because of deals, or flows or Fed guys talking," Frymier concurred, "but there's no big trend in the market right now."