Treasuries Sag Slightly, to Appealing Levels

There's demand for bonds at the latest lows, a trader says.
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Bond prices are only slightly lower this morning, in spite of a stronger-than-expected August

international trade

report that will give a boost to the third-quarter economic growth rate.

After trading down as much as 7/32 after the 8:30 a.m. EDT release of the trade report, the benchmark 30-year Treasury bond was lately down 5/32 at 96 25/32, lifting its yield 2 basis points to 6.37%. Shorter-maturity notes were higher by 3 to 4 basis points.

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The report detected the first decrease in the trade deficit in three months. It slipped to $23.1 billion from $24.9 billion in July. The average forecast was for a much smaller decline. A narrowing trade deficit can be negative for bonds because the trade deficit subtracts from the

GDP

growth rate, and the bond market prefers slower growth to keep a lid on inflation.

"Although the trade balance contracted in August due to an increase in exports, it still depicts a very strong economy,"

D.A. Davidson

trader Maryann Hurley noted in a published comment. The deficit has been rising this year because strong demand from U.S. consumers has pulled imports into the country at an ever-rising rate. The deficit narrowed in August because export growth was even stronger.

The momentum in the Treasury market remains to the downside, said Mark Mahoney, Treasury market strategist at

Warburg Dillon Read

. "It's just a matter of taking the market down to retest

Friday's lows," he said. "The market is for sale."

The good news, Mahoney said, is that Friday's lows (triggered by the hotter-than-expected

Producer Price Index

, which measures inflation at the wholesale level) are attracting buyers. A 6.37% yield on the benchmark long bond, the most recently issued 30-year bond, corresponds to yields of around 6.75% on less recently issued long bonds and around 6.90% on some Treasury STRIPS, or zero-coupon bonds. Both types of securities are less liquid than the most recently issued benchmark bond, so they trade at lower prices and higher yields.

Separately, bond market luminary Bill Gross, star portfolio manager for

Pimco

, sums up the bull case for bonds in a short, sweet

comment on the

Pimco Funds

Web site today. Inflation will remain subdued, Gross argues, "because although commodity and labor prices are on the rise, the ability for producers to pass these higher costs on is limited."

Reiterating a position he has previously outlined at greater length in his regular monthly commentaries for Pimco, Gross concludes that "30-year Treasury yields are now in the process of topping out, and while yields could rise a little further, say 6.45%, the worst damage to Treasuries is over."