Trashed Treasury Market Attracts Buyers

After yesterday's rout, traders consider the possibility that the September jobs report will punish shorts.
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The bond market is on the rebound this morning after yesterday's vicious

selloff triggered by the


decision to adopt an official bias in favor of raising interest rates in the future.

With no major economic data on the docket today, analysts are calling this morning's move little more than a bounce off yesterday's lows, perhaps aided by favorable performance by assets that have been bedeviling the Treasury market lately: gold, oil, commodities in general and the value of the dollar against the yen. Gold, oil and the

Bridge/Commodity Research Bureau Index

are all down at this hour, while the dollar is up against the yen.

"I don't particularly like the market," groused Marcello Frustaci, trader at

Daiwa Securities

. "But we had a good week and a half of trashing, so a bounce is not surprising."

"It's a very understandable thing," agreed Anthony Karydakis, senior financial economist at

Banc One Capital Markets

. "Yesterday people probably felt went a little bit too far. They didn't want to get carried away to the downside two days ahead of the employment report."

The September edition of the

employment report

, the most important economic indicator to hit the Street each month (because it influences the Fed's decisions on interest rates), comes out at 8:30 a.m. EDT Friday. A mild September jobs report might severely punish bond market shorts.

The benchmark 30-year Treasury bond, which fell more than a full point yesterday, was lately up 9/32 at 99 17/32, trimming its yield by 2 basis points, to 6.16%. Shorter-maturity notes were underperforming. For example, the two-year note yield was 3 basis points higher, at 5.81%.

That's because short yields are closely tied to the fed funds rate, while long rates reflect inflation expectations. "The bond likes the idea of the Fed being vigilant on inflation," Frustaci said.

But also, the trader said, "the technicals" -- the supply and demand dynamics -- "for the long end are going to get better." For the first time in years the Treasury won't auction a new 30-year bond in November, and it's assumed that long-dated corporate issuance is about done for the year.