Oil, Cash and Bonds Don't Mix

However, GovPX volume was down 10% when compared with the average Thursday this past month.
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External considerations took their turn in beating on the bond market, as Treasuries reacted to dollar/yen hitting yearly lows and oil prices hitting yearly highs. Several

Fed

officials were out and about, but put 'em all together, and you've got a lot of opinions that amount to an undecided Fed come Oct. 5.

"The outside influences are really hostile on a medium-term basis and I think that's a problem," said Michael Krauss, chief technical strategist at

Chase Securities

.

Of late, the 30-year Treasury bond was down 9/32 to 100 13/32.

GovPX

volume was down 10% when compared with the average Thursday this past month (that's 41% less than the average third-quarter Thursday last year, though).

Bonds were in bad shape coming into the morning, as Japanese

GDP

turned out stronger than expected for the April-June quarter. GDP grew 0.2% over the previous quarter, while the market was expecting a contraction. Dollar/yen fell sharply overnight and was lately at 107.96, which marks a new low for the year. A weak dollar ostensibly makes imports of goods and services more expensive, which is inflationary for consumers and producers alike, but on a more immediate basis it worries the market because it indicates that capital is leaving the U.S. to be invested in other countries. "People don't want to keep money in something if it's going to lose value through the currency," said John Canavan, Treasury market strategist at

Stone & McCarthy Research Assoc.

in Princeton, N.J.

New York Fed

President

William McDonough

, one of a host of Fed speakers today, told reporters after a prepared statement that he didn't believe the yen's gains were significant to the U.S. economy, but reflected the strength in the Japanese economy. Fed Governor

Roger Ferguson

also spoke today, saying the Fed would never look at one piece of data in determining policy. He added that the Fed does regard economic data more closely when their models don't seem to be working, but overall, the proposed vice chairman was basically neutral.

Hostile influence #2: Oil prices rose to a yearly high of $23.31 a barrel due to a weak weekly inventory report from the

American Petroleum Institute

. But Krauss also pointed out that the recent strength in industrial metals prices was a worry for bonds also, which can no longer dismiss commodity price improvements as limited to oil. "All those things work against the Treasury market, and the economic news is not showing a slowing as much as the market would have hoped," said Krauss.

The

Bridge/Commodity Research Bureau Index

, an index of 17 different commodities, closed at 202.52 today, a new high for the year. The rise in oil prices, as well as grains prices, are expected to be reflected in tomorrow's

Producer Price Index

report for August. The

Reuters'

consensus estimate is for a 0.3% increase in the overall PPI, the market's best indication of wholesale inflation, and a 0.1% increase in the core PPI. Suzanne Rizzo, economist at

MFR

, is forecasting a 0.6% rise in the overall PPI, but said the core should remain subdued.

Tomorrow's report, along with next week's release of the August

Consumer Price Index

, are the last two major pieces of data prior to the Fed's next meeting Oct. 5. Rizzo thinks the Fed could still raise rates before the end of the year, but said a rate increase Oct. 5 is "contingent on the price data." The Fed raised the fed funds target to 5.25% Aug. 24 from 5%.

"There's enough strong data for a good chance of a move in November," said Rizzo. "This is a pause in a strong boom -- we see more tightening."

Corporate supply also pressured Treasuries, even as the market started to scale back its estimate of the volume of supply hitting the market this month. Participants were bantering around figures of $40 billion to $60 billion, but Bill Cunningham, senior corporate bond strategist at

Merrill Lynch

, said investment-grade corporate issuance for September should total around $25 billion. This doesn't include federal agency debt, which will run between $10 billion and $15 billion, Cunningham said.