Technical Traders Hit Bonds as Stocks Rally

And market watchers aren't too optimistic about the future either.
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The bond market is shaking its fist at stocks today, but that's misplaced anger -- it's really disgusted with the entire world.

All three major indices rallied today, which induced enough selling in bonds to a level when technical traders could take over and knock the market further down. Lately the 30-year Treasury was down 1 6/32 to trade at 94 28/32, yielding 5.607%.

But analysts said today the market is also taking a hard look at the future, and doesn't like what it sees. Traders see rising oil prices, a perception that global economies are on the upswing and rotation into cyclical stocks, and have become increasingly worried about the outlook for inflation and monetary policy.

"We've had a run-up in oil prices, which is bearish for bonds, signs of recovery in manufacturing and more hawkish comments from the Fed governors that growth is not slowing down," said Henry Willmore, economist at

Barclays Capital

. "The stock market as well has had a tremendous run-up, and it's another argument that the economy will stay quite strong for a while."

Today, though, the trigger was stocks first, oil second. Bonds held their growth until around 11 a.m. EDT before the

Dow

decided it was a good day to pile onto

IBM's

(IBM) - Get Report

great earnings report and chug along to another record.

The June bond futures traded down in response to the strength in stocks, and technical traders took control, selling until the contract crossed 121 3/32. This is considered a key support level, according to

MCM Moneywatch's

Walter Burke, because bonds were able to rally from this low on Monday. The bond contract closed at 120 28/32, down 1 6/32. Closing below the support level is considered bearish, because it means those that would normally buy at this level don't feel confident enough in the market's prospects.

"The market looks up and sees the

Nasdaq

up another 50 points, and you see a bit of a bounce in commodities, and it's wearing on the market," said Tom Ruff, vice president in proprietary trading at

Daiwa Securities

. "I think the fact that we're closing at the lows means the market is doing something wrong. I presume we'll have follow-through tomorrow to even lower prices and higher yields."

Commodity prices as a whole have not demonstrated the kind of strength that can be interpreted as a full-fledged recovery. However, the rise in oil prices is no longer viewed as having plateaued. The June oil futures contract rose today to $18.18, its highest level since Dec. 26, 1997.

Part of the market's malaise arises from the continued buoyancy displayed in U.S. equities and recovery in foreign stock markets. Rotation into maligned sectors or particular markets, at times, heralds recovery in those areas. If this begins to erode some of the positive price pressures that contributed to this low inflation environment that's existed, it portends higher interest rates.

"Maybe the best of inflation has been seen," Burke said. "It doesn't mean it's here next week, but the string of decreasing inflation could be coming to an end. There's something clearly bothering the market that's not being seen right now."

Whatever it is, Ruff said it isn't looming supply, exactly, be it agency, corporate or Treasury debt.

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

both plan to sell $1 billion 10-year deal in the next two days, and Brazil intends to sell about $3 billion in bonds next week. "There's been deals priced and what not, and there's hedging from that, and the hedges are lifted, so the flows go both ways," Ruff said.

Next week the

Treasury Department

will sell $15 billion in new two-year notes, and come May it will commence the second quarterly refunding for this year. If analysts' comments are any indication, this will be an underwhelming auction. The Treasury is not expected to sell 30-year bonds, only five- and 10-year securities.

Fed

Chairman

Alan Greenspan

struck a neutral stance on the issue of converting other American economies to the dollar in his remarks before the

Senate Banking Subcommittee on Economic Policy and International Trade and Finance

. The speech didn't move the market, since he didn't address the U.S. economy.