Bonds surrendered early gains Friday to finish the day down slightly as some of the best yields in weeks invited profit-taking, oil and commodity prices rallied, and early concern about Russian involvement in the Kosovo crisis faded from the scene.
The benchmark 30-year Treasury bond finished the day down 5/32 at 96 31/32, lifting its yield a basis point to 5.46%. Shorter-maturity note yields were mostly unchanged at the end of the day.
Early in the session, the long bond rose by as much as 13/32 after the only economic release of the day, the February
Producer Price Index
, showed less inflation at the wholesale level than market participants on average were expecting. The PPI rose 0.2% overall, vs. the consensus forecast of a 0.3% gain. The core PPI, which excludes the volatile prices of food and energy, was unchanged, in line with expectations.
Good news, certainly, "but not the kind of news that would prompt a lot of buying at these yield levels," in the words of Jim Kochan, senior bond strategist at
Robert W. Baird
Helping ignite the rally was a sharp run-up in European bond prices following yesterday's interest-rate cut by the
European Central Bank
, which came after Europe's close. Lower European yields make U.S. yields more attractive on a relative basis to international investors.
In addition, alarming headlines out of Russia triggered some flight-to-safety buying of Treasuries.
Russian President Boris Yelstin
was quoted as saying in televised comments that
should not push his country toward military action, "otherwise there will be a European war for sure and possibly a world war." There were also reports that Russia had trained missiles on NATO countries. Later in the morning, the White House said it had received assurances that that was not true, and that Russia would not get involved in the Balkans conflict.
Market watchers said profit-taking was the main reason why Treasuries surrendered their gains. Bonds had rallied each day this week, leaving the long bond's yield at its lowest since Feb. 23, and the two-year note's at its lowest since Feb. 11. "We came a long way fast," said Mark Sauvigne, trader at
The rally drove yields down to important levels at which there isn't much interest in buying, Kochan added. For the long bond, the level is 5.5%; for the two-year note, it's 5%. When they get breached, "lethargy takes over again," he said.
To buy enthusiastically at those prices, Kochan said, one has to believe that the economy is going to slow substantially and the
is going to cut interest rates. "The market is getting a little expensive relative to a 4.75%
fed funds rate, that's the problem," he said. "You don't have to be bearish, because inflation is low and the Fed is not going to tighten anytime soon, but you just don't want to get too wildly bullish either."
The turnabout may also have reflected a rethinking of yesterday's rally in response to the ECB rate cut, Kochan said. "To the extent that the move causes Europe's economies to begin to recover, it's not bullish for U.S. bonds," he said. "If Asia is bottoming, and Japan is bottoming, and Europe is doing better because of lower interest rates, then one of the key element that's kept inflation low is changing."
A rally in the oil market put additional pressure on bonds. Triggered by the release of a report by the Paris-based
International Energy Agency
has begun in earnest to implement the production cuts it agreed to last month, the May crude oil contract traded on the
New York Mercantile Exchange
hopped 75 cents to 16.58. The
Commodity Research Bureau Index
, the leading commodity price index, also rose today after declining every day this week.