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Mild Rebound Confined to 30-Year Bond

The market is looking ahead to this week's quarterly Treasury refunding as well as to several key economic releases due later in the week.

Bond prices rebounded today, but it was hardly inspiring. Traders attributed today's strength -- largely confined to the 30-year Treasury -- to two separate coupon passes executed by the

Federal Reserve

and brave bargain hunters trickling into the market after last week's massive selloff.

The

Treasury Department's

$27 billion quarterly refunding commences tomorrow with the sale of $15 billion in five-year notes, and the anticipation of that supply is blocking a broader-based move higher. The Treasury will not sell 30-year bonds this quarter.

Mostly, the market was playing the waiting game today, looking ahead to this week's quarterly Treasury refunding, as well as to several key economic releases that should shed more light on the current inflation picture. The 30-year bond was lately trading at 92 10/32, up 10/32. The yield on the bond fell a basis point to 5.80%.

Between 10 a.m. and 11 a.m. EDT, the Federal Reserve purchased Treasury securities on the open market to maintain enough liquidity in the banking system so the federal funds rate, currently 4.75%, stays on target. The Fed first bought Treasury Inflation-Protected securities, or TIPs, and later purchased bonds with maturities ranging from 2006 to 2021.

"We had two coupon passes, and the market was technically oversold," said Scott Graham, co-head of government trading at

Prudential Securities

. "But are we out of the woods yet? The inflation data are going to be key once again, and the Street would like to get the auctions cheaper."

Generally, traders sell Treasuries in the weeks leading up to the Treasury's quarterly refunding to get the new paper at higher yields. That's not the only reason the five- and 10-year notes have sold off during the last few weeks (a palpable, growing fear of higher inflation comes to mind), but it helps explain why those maturities didn't join the party today. The five-year bond rose 3/32 today, while the 10-year was 1/32 higher.

Traders believe the market will rally out of relief after the 10-year auction completes the refunding Wednesday, but that doesn't mean the bearish sentiment inherent in the market will dissipate overnight. "You have had the larger, bigger accounts selling, and you need them to come back before there's a significant change in market psychology," said Graham.

Investors' negativity stems from several days of massive selling that began with the

April 30 release of first-quarter

GDP

. The fear of rising inflation, built on the continued economic strength and the steady rise in oil prices, bred more negativity and completely steamrolled

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Friday's seemingly friendly April

employment report.

Besides this impending supply, investors are shrinking from the

Producer Price Index

and the

Consumer Price Index

, two more key inflationary reports to be released Thursday and Friday.

Economists expect these two reports to finally reflect the rise in crude oil and gasoline prices. Lately the June crude oil contract was trading at $18.50 on the

New York Mercantile Exchange , compared with $16.58 one month ago. Both reports are expected to rise 0.4%, according to

Reuters'

consensus estimates.

"Normally the market will be able to forgive an energy price increase," said Mike Cloherty, senior market economist at

Credit Suisse First Boston

. "If sentiment really sours though, you could see a little reaction" if the data comes in as expected.

The core CPI, which excludes energy and food prices, is only expected to rise 0.2%, and the core PPI is called up 0.1%.

Trading volume was low again, indicating support for higher prices is relatively narrow. Tracker

GovPX

reported volume down 22% when compared to the average second-quarter Monday.