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Slow Day in Treasuries Invites Speculation

What's behind the very good behavior of the bond market lately?

Days like today in the bond market -- with hardly any price action, zilcho on the economic calendar and the only potentially interesting event of the day (a neutral

speech by

Fed

Chairman

Alan Greenspan

) over by 8:30 a.m. EST -- invite general speculation.

On questions like why

some days the Treasury market seems to care about what the

Nasdaq Composite Index

is doing and other days, like today, it doesn't. On Monday, a big retreat by the Comp gave Treasury prices a boost, as falling stock prices supposedly gave bond traders reason to hope that the economy will cool off. But yesterday and today, big gains by the Nasdaq haven't done anything, really, to derail the bond rally.

"Maybe the bond market is taking its cues more from volatility in the equity market than from the equity market's direction," says Michael Ryan, senior fixed-income strategist at

PaineWebber

.

In other words, if all the major stock proxies were flying today, it's hard to imagine the Treasury market holding in so well. Instead, "continued mixed signals from the stock market are probably preventing any selloff in bonds," Ryan says.

At the same time, long-maturity Treasuries continue to be supported by very favorable technical trends, Ryan says. Not only is the

Treasury Department

reducing the supply of long-maturity issues through its buyback program and by cutting back on new issuance, but the other bond markets, like the stock market, have been beset with volatility lately. That's why the 30-year bond's yield is lower than the Fed's new 6% target for the

fed funds rate

"with no sign the economy's slowing, no evidence the Fed's completed its tightening program, and no sign price pressures are abating," Ryan observes. The long end of the Treasury market may be overbought from a fundamental standpoint, but with technical factors ruling the day, "you don't want to get caught not owning them."

Walter Burke, chief technical strategist at

MCM Moneywatch

, confirms that the long-term trend in the Treasury market is still bullish. He cites principally the fact that the bear trend in yields that started in October 1998 has now been broken not only by the 30-year bond but also by the 10-year note. And the five-year note is close to breaking it. The two-year note is still in a bear trend but, Burke says, the point is that it's not just the bond any more. "It's spreading inside the curve too."

Burke also notes that the put-call ratio in options on bond futures -- a contrarian indicator -- at 1.52 is at its highest since 1996. Put options on bond futures are a bet that bond prices are going lower, while calls are a bet that bond prices are going higher. A high put-call ratio signals a high degree of pessimism, which may indicate that investors are on the verge of optimism.

The performance of the 10-year note has indeed been extraordinary over the last week. Its yield has fallen appreciably relative to that of the other Treasury benchmarks.

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This has been interpreted as a very strong sign for the Treasury market. But at the same time, as

Bear Stearns

Treasury market strategist Avram Altaras points out, it's due in large measure to extraordinary demand for the most recently issued 10-year note, and not for the 10-year sector as a whole. That makes it less bullish as a signal, Altaras says.

Demand for the newest 10-year note presumably comes from the hedging community, which has rejected the 30-year bond as a hedging instrument because the government's supply-reduction plans have distorted its value. Along with the 10-year's increase in popularity as an alternative hedging instrument, it has become extremely cheap to finance. In short, the newest 10-year note isn't quite so hot a performer once you adjust for the low cost of financing it. "It's somewhat illusory," Altaras says.

In late trading the 10-year note was up 3/32 at 102 23/32, trimming its yield 1.2 basis points to 6.129%. The 30-year bond gained 4/32 to 103 31/32, dropping its yield a fraction of a basis point to 5.964%. The two-year note was unchanged at 100, its yield 6.497%.

At the

Chicago Board of Trade

, the June

Treasury futures contract fell 1/32 to 96 18/32.

Economic Indicators

The weekly

Mortgage Applications Survey

detected a decrease in refinancing activity and an increase in new mortgage activity. The Refinancing Index fell to 346.2 from 361.8, while the Purchase Index rose to 293.5 from 290.

Currency and Commodities

The dollar gained against the yen and the euro. It lately was worth 107.02 yen, up from 106.87 yesterday. The euro was worth $0.9608, down from $0.9639. For more on currencies, please take a look at

TSC's

new

Currency Watch column.

Crude oil for May delivery at the

New York Mercantile Exchange

fell to $27.40 a barrel from $27.81.

The

Bridge Commodity Research Bureau Index

rose to 213.87 from 213.56.

Gold for April delivery at the

Comex

fell to $288.3 an ounce from $290.4.