Consensus Builds Around a Half-Point Hike

But that didn't hurt the bond market today, which clawed its way back to unchanged as stocks stumbled.
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The bond market ended a lackluster session with most issues close to unchanged. It managed to shake off earlier weakness as stock prices eroded over the course of the day.

The day's only economic release --

existing home sales

for February -- was a nonstarter, as was a

speech by

Fed

Chairman

Alan Greenspan

on Social Security and Medicare financing.

And the price of oil didn't provide much guidance, as

OPEC

ministers, meeting in Vienna, failed to reach an agreement on increasing production and adjourned till tomorrow.

But considering the backdrop of rising fears that the

Federal Open Market Committee

will wheel out the big guns at its next meeting on May 16 and hike the

fed funds rate

by 50 basis points, the price action was good.

Ever since the FOMC released the minutes of its Feb. 1-2 meeting on Thursday, which revealed that at least some committee members were prepared to consider hiking the fed funds rate in increments larger than 25 basis points in response to signs of rising inflation, traders have been upgrading the risk that the May 16 meeting will produce the first 50-basis-point hike since February 1995. That continued today. The

fed funds futures

contracts listed on the

Chicago Board of Trade

discounted a 53% chance of a hike in the fed funds rate from 6% to 6.50% on May 16, up from 41% on Friday.

The implications for long-term Treasury yields aren't clear. Joe LaVorgna, senior U.S. economist at

Deutsche Bank Securities

, expects "more inflation, not less, and higher yields." On the other hand, Don Kowalchik, associate fixed-income analyst at

A.G. Edwards

, argues that a 50-basis-point hike might trigger a selloff in the stock market that could send money Treasuries' way.

A more unambiguously bearish sign for the Treasury market came in the form of the latest biweekly Commitments of Traders report from the

Commodity Futures Trading Commission

, released Friday after the close.

The report showed the biggest net long position among speculators in key interest-rate futures contracts (with the notable exception of the Treasury bond contract) since late summer 1998. Extreme net long positions among speculators often coincide with peaks in prices.

"This suggests that little buying away from the large speculators has taken place," explains

Jim Bianco

, president of

Bianco Research

, in an analysis of the numbers. "In other words, it suggests that the rally from the January 2000 low was largely a short-covering affair."

"For prices to continue to move higher," Bianco adds, "someone other than the large speculators must step up and start buying. We have seen little evidence of others interested in committing new money to the bond market. They are too busy buying technology stocks."

The benchmark 10-year Treasury note ended the day unchanged, its yield 6.191%. The 30-year bond gained 7/32 to 103 25/32, trimming its yield 1.6 basis points to 5.977%. The two-year note gained 1/32 to 99 25/32, dropping its yield 1.8 basis points to 6.619%.

At the

Chicago Board of Trade

, the June

Treasury futures contract gained 2/32 to 96 3/32.

Economic Indicators

Existing home sales surged 6.7% in February to a pace of 4.75 million from a revised 4.45 million in January. The pace peaked in June at 5.59 million. The January pace was the slowest since November 1997.

Currency and Commodities

The dollar fell against the yen and gained against the euro. It lately was worth 106.75 yen, down from 106.88 on Friday. The euro was worth $0.9667, down from $0.9769. For more on currencies, please take a look at

TSC's

new

Currency Watch column.

Crude oil for May delivery at the

New York Mercantile Exchange

fell to $27.79 a barrel from $28.02.

The

Bridge Commodity Research Bureau Index

fell to 212.30 from 212.59.

Gold for April delivery at the

Comex

fell to $280.50 an ounce from $285.10.