Out of Supply's Way, Bonds Rally on Economic Data

Whether Treasuries can extend this rally will depend on tomorrow's April Consumer Price Index data.
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Bonds strengthened on this morning's benign economic releases, one of the first positive reactions to economic data in almost two weeks. The 30-year Treasury bond rose a full point on the release of the April

Producer Price Index

and

retail sales

reports, and has held most of that gain.

Now that the bond market has lost one of its favorite rumors for which to sell bonds -- namely, that

Robert Rubin

was planning on resigning as

Treasury

secretary -- it's advancing on more plebian, tangible concerns. Analysts were expecting a rally with yesterday's completion of the $27 billion quarterly Treasury refunding, and the market has used the better-than-expected PPI to do just that.

"Now the refunding is over and

dealers have no need to mark down securities," said Josh Stiles, senior bond strategist at

IDEAglobal.com

. "This is a post-supply relief rally encouraged by the retail sales numbers and an already discounted rise in the PPI."

Lately the 30-year Treasury bond was up 24/32 to trade at 92 21/32. The yield fell 6 basis points to 5.77%.

The April PPI rose 0.5%, but the market was expecting a 0.6% rise due to the steady increase in oil prices since February. Gasoline prices rose 29% in April, but the advance in the energy sector was offset by a surprising 0.9% drop in food prices. The core PPI, which excludes food and energy, only rose 0.1%, and that's good for the market because it indicates companies can still produce goods cheaply.

Is the pace of consumer spending finally slowing a bit? Retail sales rose only 0.1% in April, which follows a revised 0.1% rate of sales in March. Economists at

Barclays Capital

are estimating that consumption growth in the second quarter will fall between 3% and 4%, compared with 6.7% in the first quarter. Consumer spending is the engine fueling this economic boom, and moderation there might help hold inflationary pressures in check.

Whether Treasuries can extend this rally will depend on tomorrow's April

Consumer Price Index

. The

Reuters

consensus estimate is for a 0.4% rise overall and a 0.2% rise in the core rate. "If the core rate is more subdued maybe we can break below 5.75% on the bond," said Stiles.