Bonds Up but Low Volume Distorting Picture

Some of the buying today is tied to month-end index duration extension.
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Don't read too much into any move today, because traders are already tidying up their desks before the Memorial Day three-day weekend. Some strong economic data are being offset by month-end related buying, but the lack of volume outweighs either today.

Lately the 30-year Treasury bond was up 11/32 to trade at 91 31/32. The yield fell 3 basis points to 5.82%. Tracker

GovPX

said volume was 25% less than the usual for a second-quarter Friday, with just $17 billion changing hands by 10 a.m. EDT.

"It doesn't take much to push the market around a little bit today," said George Simon, market analyst at

A.G. Edwards

. "I don't think we'd trade this high if it were a regular volume day."

Chicago's purchasing managers' index

, a key measure of how the manufacturing sector is performing, fell to 57.9 in May from April's reading of 63.3.

"We were down about one-eighth of a point right after the data, but it seems like that was some profit-taking," said Simon. The Chicago PMI is "is a positive because it was pretty strong

in April. We were expecting

a reading of 60."

This is the fourth straight month the index has read above 50, which indicates expansion in the manufacturing sector. A reading below 50 indicates contraction. Though this improving sentiment hasn't translated to price appreciation or job gains yet (manufacturing lost 29,000 jobs in May, according to the

Labor Department

), the continued strength in this survey doesn't allay the market's fears of impending inflation.

Some of the buying today is tied to month-end index duration extension. The overall duration of

Lehman Brothers

index of Treasury bonds is expected to rise by 0.2 years today, reflecting the Treasury's quarterly refunding sales. This is compared to an average extension of 0.08 years. The government sold $27 billion in five-year and 10-year notes earlier this month.

Usually, investors that tie their performance to a specific index buy bonds at the end of a month when that index is adjusted to account for sales of government bonds that took place that month. This is most important in months when a quarterly refunding takes place.

Personal income

rose 0.5% in the month of April, the

Commerce Department

said this morning.

Consumption

rose 0.4%, in line with expectations reported by

Reuters

. Economists were expecting a 0.4% rise in personal income. The

University of Michigan's consumer sentiment

index was revised to 106.8 in May from its earlier reading of 106.4.

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