Bonds Take a Breather After Post-Fed Rally

Conflicting economic data didn't help matters.
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The bond market endured a boring session that saw most of the Treasury yield curve close around unchanged. The 30-year bond was the exception, losing some ground in the mid-afternoon. Analysts attributed this to some profit-taking after the yield spread between two-year notes and 30-year bonds narrowed to 46 basis points

yesterday from 55 basis points Tuesday.

"There was a huge flattening yesterday and that's taken a breather, and the intermediate part is doing a little better," said Mitch Stapley, chief fixed income officer at

Kent Funds

. "The market is still looking for

retail sponsorship."

Lately the 30-year bond fell 4/32 to 91 28/32. The yield rose 3 basis points to 5.83%. The spread between the two-year and 30-year maturities widened to 50 basis points from 46 Wednesday.

One would think the release of the

international trade

data,

Philadelphia Fed index

, and

initial jobless claims

data would rouse the market a bit. But bond traders took this day as a breather after Wednesday's solid long-bond rally, spurred by the Fed's announcement to adopt a bias toward tightening interest rates. (Or they were too overcome by the new

Star Wars

film.)

Tracker

GovPX

reported volume down 38% when compared to the average first-quarter Thursday. The lack of action, despite some interesting economic data, could be a harbinger of next week's activity, which counts only one or two pieces of potentially market-moving news.

"Volume was light and it looks like we're in a range, waiting for news," said

ABN Amro's

market strategist, Charles Reinhard. "I don't think any reports between now and June 1's

NAPM

report are going to matter very much." The

National Association of Purchasing Management

releases the May

Purchasing Managers Index

, a key manufacturing indicator, on that date.

The international trade deficit rose 2.9% to an all-time high of $19.7 billion in March from $19.2 billion in February. This is positive news for bonds because it will cut into the revised first-quarter

GDP

report, released next Thursday. Exports grew by 0.9%, but import growth outpaced that, rising 1.3% during the month. But the bond market is well used to the trade deficit's light-saber effect on GDP, and therefore doesn't get excited about it.

The Philadelphia Fed index, another key indicator of manufacturing sentiment, fell to 21.1 in May from 26.4 in April. The market briefly traded higher, but the reaction wasn't sustained. "The Philly Fed report was very close to what the market was looking for, so it became a non-event," said Reinhard. "Today, everybody was looking

at this meeting but there was nothing to watch."

Initial jobless claims fell to 299,000 for the week ended May 15 from 311,000 the previous week. The four-week moving average fell to 302,750 from 306,250.

Next week's most significant reports are the volatile

durable goods

release and the

Chicago purchasing managers index

, as well as the GDP revision. But now that the Fed has

shown its hand, the market will probably listen to speeches by Fed members for clues on what action, if any, the Fed will take at the June 30

Federal Open Market Committee

meeting. Fed Chairman

Alan Greenspan

testified today before the

House Banking Committee

on international financial architecture, but didn't address monetary policy.

It's hard to get excited anymore when the Fed releases the

minutes from its previous gathering. After a scary

speech May 6 from

Alan Greenspan

and the Fed's decision Tuesday to shift to a tightening directive, March 30 seems like the Pre-Cambrian period.

For what it's worth, the committee stuck with neutral, although some members, worried about the pace of growth, said the next action taken would most likely be a rate hike. "A number of members noted that a case might be made for unwinding part of the Committee's easing actions during the fall of last year," the minutes said. But the members "argued that the incoming data and prospects for sustained favorable economic performance did not support such an action."