Technicals Lift Long Bond, While Supply Outlook Pressures Notes

In the economic department, the focus is on reports due out starting Thursday.
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A technical rally lifted the long Treasury bond's price today, while shorter-maturity notes were flat to lower in price due to impending new issues in that sector.

The benchmark 30-year bond rose 13/32 to 95 23/32, trimming its yield 2 basis points to 5.55%. But the two-year note, the shortest Treasury coupon, lost 1/32, lifting its yield 2 basis points to 5.03%.

Most of the activity occurred in the mid-morning, and market watchers said it was largely technical in nature. "It was nothing more than a technical rally off the bottom of the trading range," said Mark Mahoney, Treasury market strategist at

Warburg Dillon Read


Walter Burke, senior technical analyst at

MCM Moneywatch

, said two strategies worked to lift prices in the bond futures market. In the first, traders watched the September long bond contract traded on the

Chicago Board of Trade

retrace its decline from a price of 122 15/32 last Wednesday to 120 8/32 yesterday. As the price retraced 50% of the decline and then 62%, considered key retracement levels, shorts covered, propelling the contract higher, Burke said. "When we violated those levels, enough people were bearish using those levels as stops" to really get things moving, he said.

In the second strategy, Burke said traders who buy the contract when its price goes above a moving average fell all over each other to buy because a number of short-term moving averages -- the 5-, 21- and 40-day -- converged at around 121 12/32, where the futures settled yesterday. When the price rose above that level, the buyers piled in.

At the same time, the short end of the Treasury curve languished because it has to cope with fresh supply in the coming days. The monthly issue of new two-year notes happens tomorrow, and in two weeks, the Treasury will issue new five- and 10-year notes in the quarterly refunding. In every refunding except the May refunding, the Treasury also issues new 30-year bonds.

"I think the front end is having a difficult time participating" because of the supply outlook, Mahoney said.

Economic news had little effect on the market. Two monthly reports were stronger than expected -- the April

Consumer Confidence Index

rose 0.9 to 134.9, vs. an average forecast of a decline to 133.5 among economists surveyed by


; and March

existing home sales

climbed to a record 5.05 million pace from 5.02 million, vs. expectations for a decline to 4.92 million.

But the focus in the economic department is squarely on the higher-profile reports that come out later this week and next week -- the first-quarter

Employment Cost Index

on Thursday, first-quarter

gross domestic product

on Friday, the April

Purchasing Managers Index

on Monday, and the April

employment report

next Friday.

Those reports "are going to set the tone and determine whether we stay in this trading band or move out of it," said Kevin Flanagan, money-market economist at

Morgan Stanley Dean Witter

. The long Treasury bond has traded in a range between 5.45% and 5.70% since late February.

Flanagan thinks that if the range breaks, it will be to the upside in price, meaning lower yields. "I don't think there appears to be anything on the horizon suggesting that rates have to go up in any significant fashion," he said. Even if GDP is stronger than expected (the average forecast is for a 3.3% rate), Flanagan thinks that inflation, as measured by the GDP price measures and by the ECI, will remain tame. "That's the key to it all," he said.