Bonds retreated today, driving the benchmark 30-year Treasury's yield to its highest level since March 8, as the stock market refused to be contained by the bombing of Yugoslavia and oil prices rose again.
On Tuesday and Wednesday, Treasuries rallied as diplomatic efforts to end Serbian hostilities in Kosovo failed and the countdown to
bombing of the province began. In times of strife, safe, liquid U.S. government obligations typically enjoy strong demand.
As Treasuries rallied, stocks sagged. But the bombing started last night, and today stocks took off, deflating hopes that the conflict would curb investor appetite for risk. Grudgingly, Treasuries gave back their gains of the last two days. The long bond ended the day down 24/32 at 95 5/32, boosting its yield 6 basis points to 5.59%.
"The equity market recovered despite the Kosovo situation," said Richard Gilhooly, senior bond strategist at
Paribas Capital Markets
. "Going into it Treasuries rallied and the curve steepened
as short maturities, the most liquid Treasuries of all, outperformed. Now we have an unwind of the Kosovo situation with equities going higher."
The rebound in oil prices after two negative sessions also helped push bond prices lower, Gilhooly said. The May crude oil futures contract rose 0.35 to 15.69, shy of, but threatening, the near six-month high of 15.74 it closed at on Monday. Making matters worse, the
Commodity Research Bureau Index
, the leading commodity price index, tacked on 2.46 to 191.17, its highest close since Jan. 15. Because inflation hurts bonds more than shorter-maturity notes, notes suffered less in today's rout.
At the same time, the day's economic data offered no reason to hope interest rates will stay low. The
weekly tally of
initial jobless claims
remained below 300,000, signaling an extremely tight labor market. The count dropped by 10,000 to 289,000. Another labor-market indicator, the
for February, also remained near its cycle high, shedding a point to 93. And the pace of
existing home sales
barely slowed in February, to 5.02 million from January's all-time high of 5.04 million, promising a high tide of consumer spending on furniture and home improvements in the months ahead.
The day's action points up the fact that the bond market remains a basket case, surer of itself when it's tanking than when it's rallying, said Anthony Karydakis, senior financial economist at
First Chicago Capital Markets
. "The market is still vulnerable," he said. "It was still fragile despite the tentative gains of the past two days. When you get a push higher and there's not much follow-through, the natural tendency of a fragile market is to retreat.
"Nobody got excited" as Treasuries rallied on light volume in the two weeks after the March 5 release of the February
, and that "included the seeds of a pullback," the strategist continued. The market "was exposed to the slightest developments going in the wrong direction," and it got them today in the shape of rising oil and stock prices.