Sagging Stocks Boost Resilient Treasuries

European bonds, which have in recent weeks contributed to Treasury selloffs, also lent a hand in the market's strength.
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The bond market showed resilience today, climbing into positive territory after spending most of the morning underwater.

Prolonged weakness in the stock market, as well as a late recovery in European bonds, helped Treasuries into the black.

"It's a decent comeback, all in all," said Bill Kirby, co-head of government bond trading at

Prudential Securities

. "It's a better performance, but we're not ready to break out of the range in front of

Humphrey-Hawkins

on Thursday."

However, the market may be feeling somewhat relaxed ahead of that important congressional testimony on monetary policy from

Federal Reserve

Chairman

Alan Greenspan

, judging by the strength in the short maturities of the Treasury yield curve. While the benchmark 30-year Treasury bond rose 5/32 to 91 5/32 today, the two-year note was 4/32 higher, dropping the note's yield by 4 basis points to 5.40%. The 30-year's yield fell 1 basis point to 5.89%. (It takes less of a price movement in shorter maturities to affect the yield.)

Treasuries got a lift today from weakened stocks, which continued to slide off the record levels all three major indices reached last week. The

Nasdaq Composite Index

was down 98 points, or 3%, today while the

Dow

fell 192 points.

The 30-year bond was down as much as 17/32 before rallying in the afternoon. The two-year note was off 3/32 at its low at 8:29 a.m. EDT.

"The story is really in the short end," said Mike McGlone, vice president at

Aubrey G. Lanston

. "Stocks have been weak all day, and it seems to have accelerated the bid" in short maturities.

The spread, or difference in yield, between two-year notes and the 30-year Treasury bond rose to 49 basis points today compared with 41 basis points one week ago. Two traders said participants were selling 30-year bonds and buying two-year notes, reflecting a modicum of confidence that the Fed will not raise rates at the Aug. 24

Federal Open Market Committee

meeting.

Two-year notes trade on expectations of Fed monetary policy, and the market's heartened by last week's release of the June

Consumer Price Index

, unchanged for the second month in a row, and also by

Richmond Fed

President

Al Broaddus

. Normally one of the most supportive of higher interest rates, Broaddus said yesterday that he was relieved that April's surprising 0.4% rise in core CPI seems to be an anomaly. These words have the market hoping Greenspan's going to indicate that interest rates will be left alone, at least at the next meeting.

European bonds, which have in recent weeks contributed to Treasury selloffs, also lent a hand in the market's strength. The German 10-year September Bund futures, which closed at 94.07 yesterday, was down by about one-half a point before recovering and finishing at 94.51, yielding 4.74%, according to one trader.

Recent weakness in the dollar against the yen also may have brought in some buyers, and paradoxically, today's strength may have prompted buying as well. McGlone said long-term foreign buyers tend to come into the Treasury market when the dollar weakens, figuring it to be a value opportunity. "The knee-jerk reaction yesterday when you see dollar weakness is for the market to sell long paper, but from an investor standpoint, dollar weakness begets buyers," he said.

Dollar/yen rose today as the Federal Reserve did the

Bank of Japan's

bidding, intervening in the currency market to weaken the yen against the dollar. Japanese officials have worried about excessive strength in the yen, because a stronger currency makes exports more expensive, undermining the country's economic recovery. Dollar/yen was lately up 0.02 to 118.90.