For Bonds, Today Was a Good Day

The 30-year bond was up over a point, but volume was extremely thin.
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Treasuries rallied sharply on flight-to-quality buying today, sparked by massive selloffs in Latin American equity markets. The 30-year bond yield closed at its lowest level since May 28, but participants described the action as extremely thin.

Pin the rally on the power of positive thinking -- and patience. The bond market tried to move higher last week, only to have rallies smacked down by fear of hefty corporate supply or weakness in European bond markets. So today felt like the first real breath of fresh air since the

Federal Reserve

raised the fed funds target almost two weeks ago.

"The market has been feeling better about itself, but we haven't seen it in higher prices," said George Simon, Treasury market strategist at

A.G. Edwards

. "I think the market would have traded higher

last week if it weren't for all the corporate issuance."

Lately the 30-year Treasury bond was up 1 7/32 to trade at 90 27/32. The yield fell 10 basis points to 5.91%.

Thomson Global Markets

managing analyst Ken Logan was pessimistic, terming today's rally "just an exaggerated trade in an illiquid market," and ultimately an opportunity to sell.

Argentina's

Merval

index fell 8.7% today on continued concerns about the country's deepening recession and rumors that it would default on its foreign debt, which President

Carlos Menem

refuted earlier today. Argentine Brady bonds lost ground also, as portfolio managers sold external debt in expectation of more domestic government bond issuance.

"It's been flaring up modest, albeit global, fears," said Simon. "There's been some flight-to-quality, not broad-based, buying, so we shouldn't read too much into it."

Other Latin American markets were tagged in tandem -- Brazil's

Bovespa

index fell 2.3% and Mexico's

IPC

was down 2%.

Simon said the safety buying was the impetus the bond market was waiting for. Sources interviewed during the last week have been more confident in the Treasury market, believing a trio of important upcoming economic releases will bring friendly tidings. But rallies were constrained by plunging European bond markets, which had the effect of marking down Treasuries in sympathy, and by corporate supply, most specifically

Ford's

(F) - Get Report

$8.6 billion mammoth bond offering, the largest corporate bond deal in history. The corporate calendar is still huge, but for now it's taking a breather.

June

retail sales

will be released Wednesday, along with the June

Producer Price Index

. With Thursday comes the June

Consumer Price Index

. "There's the anticipation of friendly data later in the week," said Logan. "Retail sales rose 1% last month, and that didn't shake the market up too much. The PPI and CPI data are only supposed to be up a tenth or two."

According to

Reuters

, the expectation is for a 0.4% increase in retail sales, and 0.1% for the overall PPI, PPI minus food and energy, and overall CPI. The core CPI is expected to rise 0.2%.

Benign readings on all three still might not dissuade the Fed from hiking interest rates in August. John Blough, senior investment strategist at

Fahnestock & Co.

, figures the market will look past these reports to Fed Chairman

Alan Greenspan's

semi-annual

Humphrey-Hawkins

testimony next week.

"Our economy is quite strong, and oil is above $20 a barrel, and Greenspan is going to err on the side of restraint," said Blough. Oil is currently at its highest level since November 1997.

The price of September light sweet crude oil futures traded on the

New York Mercantile Exchange rose to $20.10 a barrel today. On the other hand, the

Bridge/Commodity Research Bureau Index

continues to sputter, as other commodities have not recovered the way oil has. It fell to $183.75 today, meanwhile, not far off the 18-year low of $182.76.