Bonds' Urge to Rally Rises, Then Fades

The market is awaiting CPI and PPI data due later this week.
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This morning was deja vu all over again in the bond market when Treasuries rallied on another selloff in Latin American stock and bond markets. But since that torrid initial plunge, Argentina's Merval index, initially the hardest hit, has recovered, and Treasury bonds have erased their gains.

The 30-year Treasury bond was lately down 2/32 to trade at 90 26/32, off the 91 18/32 high reached at 9:47 a.m. EDT. The yield was down 1 basis point to 5.91%.

No profound reason emerged to prompt this morning's selloff in Argentina and other Latin American markets, just continued worries about Argentina's deepening recession. The Merval was lately up 2.3% points. Argentina's benchmark bond maturing in 2027 fell to 64.5 from 69.7 but recovered to 66.5 by 10:40 a.m. EDT, said Tony Crescenzi, chief fixed income strategist at

Miller Tabak Hirsch


Crescenzi added that today's early rally may have resulted in "forced buying" from mortgage investors. These investors are generally induced to buy into a Treasury rally because they're worried about mortgage prepayments, which would potentially hurt their performance. This activity is common in the 10-year note, which as of this morning yielded 5.70%, 22 basis points lower than July 7's 5.92% close.

"This smacks of forced buying, short-covering, and spread product flows into Treasuries," Crescenzi said. "I think the Argentina thing is a thing used as a catalyst for consolidating bond market losses and stock market gains. It means a lot in the short run, but in the long run it means squat -- I wouldn't be surprised to see the bond market down on the day."

Government bonds had stubbornly held their gains because other debt markets -- corporate and foreign -- didn't recover with quite the gusto of Latin American equities. "The credit products are not trading well, and

foreign spreads are under a little bit of pressure," said Ken Fan, bond strategist at

Paribas Capital Markets

. "It underlines concerns about Latin America. This seems to be a little positive for Treasuries -- they're just a safer bet." Crescenzi added that the recent Treasury rally could cancel out any gains the market might have squeezed out on friendly inflation news later this week. Tomorrow brings the June

Producer Price Index

, and with Thursday comes the June

Consumer Price Index

. Both are key indicators of inflation, and the consensus forecast is for a meager 0.1% rise in both, according to