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Treasury Yields Creep Lower for a Second Day

The recovery from last week's bloodbath continues.

The Treasury market today continued to recover from last week's bloodbath, in spite of another surge in

housing starts

. Driven primarily by another decline in Japanese bond yields, which lifted the dollar against the yen, the benchmark 30-year bond finished the day up 18/32 at 99 5/32, dropping its yield 4 basis points to 5.31%. At least a quarter of the gain came late in the afternoon, as stocks' losses deepened.

The long bond has now shed a dozen basis points since Friday's close, the highest yield in nearly six months.

"We finally bottomed out Friday and yesterday and are seeing a bit of a rebound," said John Canavan, Treasury market strategist at

Stone & McCarthy Research Associates

in Princeton. "It's not much of a gain, though, considering how much was lost." Trading was light, he noted -- 36.8% below average for a first-quarter Wednesday, according to tracker



Canavan said early rumors of buying by hedge funds and foreign central banks gave the market a bullish tone.

"It all fell together quite nicely for a rally," said Scott Graham, co-head of government bond trading at

Prudential Securities

. "The market backed up about 35 basis points

from Jan. 30 through last Friday, the dollar started strengthening, the fundamentals confirmed it, and customers clearly have a lot of cash on the sidelines."

Anticipation that the

Producer Price Index

and the

Consumer Price Index

will both continue to be friendly when they are released tomorrow and Friday is a big part of the fundamental case for owning bonds, Graham said. Continued signs of economic strength like the January housing starts report are lifting the dollar, but to the extent that a stronger dollar keeps inflation in check by holding import prices down, it supports bond prices. The January

capacity utilization rate

of 80.5%, the lowest since January 1992, is a similarly bullish sign that inflation is nonresponsive.

"While the economy is obviously strong and sentiment remains a bit more bearish," Stone & McCarthy's Canavan said, "by the same token there are no signs of inflation out there. So I don't think we'll enter into a serious bear market in bonds."

January housing starts numbered 1.804 million, up 3.8% from December's 1.738 million pace and a 12-year high. A decline to 1.68 million had been forecast by economists surveyed by


. But while housing starts are considered a good leading indicator of consumer spending, this sector of the economy has been so strong for so long -- powered mainly by low interest rates -- that new records have ceased to impress.

The dollar extended yesterday's rally into today as Japanese interest rates continued to drop, still fueled by yesterday's news that the Japanese government will take measures to keep them down. Lower Japanese interest rates help Treasuries by competing less strongly for investor dollars, and by weakening the yen. The benchmark 10-year Japanese government bond yield dropped to 1.95% from 1.99%, and the dollar rose from 118.65 yen to 118.85.