European Rally Allows Bonds to Relax, Unwind

Volume in the market was below average.
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European bonds finally got to benefit from the Treasury's post-

employment

rally, and as a matter of consequence helped the U.S. market to another full-point rally.

Since April is bit of a rough month for the market, participation is limited to traders buying at the bottom of this trading range and selling at the top.

Lately the 30-year Treasury bond was up 30/32 to trade at 96 2/32. The yield dropped to 5.522%. Three trading sessions after broaching the high end of the range, the bond yield is already approaching the established low, as prices approach the high.

GovPX

volume was down 16.7% when compared to the average second-quarter Tuesday.

"Unless the news starts weakening quickly here, this is going to be another selling opportunity," said Michael Krauss, chief technical analyst at

Chase Securities

.

A popular trade of late has been a curve-steepening trade, which involves selling short long bonds and buying up short maturities, especially the two-year note. The

Federal Reserve

helped out this trade -- they didn't raise rates, and officials' statements indicate they are less concerned over the pace of productivity. The two-year note is the cash security that reacts most fervently to Fed policy, and with them clearly on hold, that was supported during the last two weeks. In addition, the war in Kosovo caused a flight into these safe securities.

Today, with the announcement of a cease-fire in Yugoslavia, it's expected that the safety buying of two-year notes will dissipate, so today afforded traders the opportunity to remove the trade by selling the two-year note and buying back the 30-year bond. Lately the two-year note was up just 2/32 to yield 4.912%.

NATO

leaders rejected the announcement of a unilateral cease-fire, saying they won't stop bombing until

Yugoslavian President Slobodan Milosevic

allows ethnic Albanians to return and accepts an international peacekeeping force. But the Serbian leader's offer was the first indication, after almost two weeks of bombing, that NATO's efforts were having their desired effect of discouraging the Serbs' appetite for fighting.

"We had a nice rally in twos

versus bonds toward 70 basis points, which was a target for a lot of people," said Krauss. "It makes sense that peace is a flattener, especially if the catalyst for a steepening was, 'Hey, there's a war going on.'"

Unwinding of that trade helped Treasuries sustain a rally that began in the morning with the reopening of the European markets, closed since last Friday. Today, the European markets played catch-up to the Treasury rally. Gilts and Bunds both rose about one point in trading, tightening about 5 basis points in terms of yield. Speculation that both the

European Central Bank

and the

Bank of England

will cut rates later this week also helped fuel that rally, and is a marginal factor in improving sentiment in the U.S. The BOE's short-term rate was last lowered to 5.5% in February; the EMU's rate stands at its originally targeted 3%.

"Globally, interest rates tend to move together," said Adam Blankman, Treasury market analyst at

Standard & Poor's MMS

. "Also, I think rate cuts in those countries would weaken those currencies and increase the relative strength of the dollar, so there's a residual benefit from the increased strength in dollar assets."

Economic indicators were in line with expectations today. The

Conference Board's

index of

leading economic indicators

rose 0.2% in February, as compared with a 0.5% increase in January. Two weekly retail sales indicators,

BTM/Schroder

and

LJR Redbook

, both rose 0.8%.