Bonds Sluggish, Like a Wet Sponge

They followed the vacillating stock market around throughout the day.
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It's not often that a trading day resembles the weather. But today did -- it was light precipitation that didn't really stick. At 12:30 p.m. EST the 30-year Treasury bond was down 18/32. Four hours later, not much had changed. The bond was lately down 20/32 to trade at 101 31/32, as the yield rose to 5.12%.

Expectations as reported by

Reuters

Bonds followed the stock market around throughout the day, which is like asking a chicken with its head cut off to give directions to the Tazmanian Devil. The

Dow

vacillated between up 20 points and down 40 points before rallying in the last hour of trading. Since bond trading is taking its immediate cue from activity in the stock market, there wasn't much direction from the late morning to the futures close.

The cash bond actually performed worse than the futures contract, but this was considered turnabout from Friday's action, when the long bond continued to trade up after the futures market closed at 3 p.m. The futures contract closed at 127 13/32, down 13/32 on the day.

"The stock market is the major focus; it ticks up, bonds trade off," says Josh Stiles, senior bond strategist at

I.D.E.A.

"A lot of it is just speculative day traders trying to make something out of nothing."

GovPX

volume was light in the afternoon as today's action continued the range trade that bonds have been stuck in for the past three months. Volume was 23% less than the average Monday at this time last year.

Despite the strength in

existing home sales

, this was not considered the cause of the early decline in Treasuries. "The market has gotten used to strong housing figures," Stiles says.

The bias in the Treasury market is expected to be mildly negative for the next few weeks in anticipation of the quarterly Treasury refunding. The two-year note is currently trading at 4.60%, and with the two-year note auction coming up on Wednesday, one would have expected it to trade wider. The when-issued two-year bond is currently trading at 5.54%.

The buying in this maturity is being driven by the theory that the stock market's bubble might eventually burst and slow the economy to the point where the

Federal Reserve

would have to cut interest rates again.

"Consumer spending has been responsible for our economic momentum," says Mike Cloherty, senior markets economist at

Credit Suisse First Boston

. "A significant portion of that appears to be driven by the wealth effect. The concern is, if stocks trade off sharply, you could have consumers cut back on spending."

That theory may sound contrived at this point, but Fed chairman

Alan Greenspan

did spend most of his time talking about stocks before the

House Ways and Means Committee

last week. Either you believe the Fed-head was downplaying recent comments by colleagues in saying that the Fed's job is to maintain the economy and not worry about equity prices, or he's seriously concerned the stock market is going to knock the economy off its tracks. A story in

Market News International

indicated that's the Fed's largest concern, but the Fed nonetheless hasn't changed monetary policy in response to rising stock prices -- when it certainly had the opportunity last year.

Like Roger Bannister, sales of existing homes surpassed a level previously thought unattainable. In December, 5.03 million homes were purchased on an annualized basis, and 4.78 million were purchased in all of 1998, breaking the record by 13.3%.

Tomorrow's economic data is light -- two weekly retail sales reports and the

Conference Board's

index of

consumer confidence

, which isn't going to keep traders awake at night in anticipation.

Expectations as reported by

Reuters