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Two-Day Rally Runs Out of Gas

Economic data and a strong stock market pressured Treasuries.

Coming off a two-day rally, bonds ran into resistance and took a step back today, in what looks like the nascent stages of another range trade. Retail interest in the market remains limited, so the rally gave way to a session of selling and profit taking. The resilience displayed by the stock market and economic data certainly didn't help.

Traders said the performance displayed today indicates that the institutional community is being well served by last week's Treasury supply and the continued corporate supply. The remainder of the market isn't going to bet on yields dropping ahead of

Fed

Chairman

TST Recommends

Alan Greenspan's Humphrey-Hawkins

testimony on Tuesday, especially after yesterday's

housing

data and today's weekly

initial jobless claims

figures.

Lately the 30-year Treasury bond was down 25/32 to trade at 98 9/32, giving back nearly the entire Wednesday rally. The yield on the bond rose to 5.366%.

Initial jobless claims fell to 288,000 this week, while the four-week moving average fell to 292,000.

"It looks like people got off on the wrong foot today," said Hamilton Davis, vice president in government trading at

Everen Securities

in Chicago. "The data was stronger than expected, with the four-week average for initial claims moving to their lowest level since February 1989."

The

producer price index

, also released today, rose 0.5% in January, attributed heavily to a 19.6% rise in fresh fruit prices. Excluding food and energy prices, the core PPI fell 0.1%, which would normally be good news for the bond market. But this information was overshadowed both by the claims data and the stock market. All major stock indices were higher on the day, led by the

Dow

, which closed up more than 100 points.

"We rallied back to levels that represented resistance and that was it," said one trader based in New York. "We got to a level where the rally ran out of buyers; some people were buying corporates, but right now, on rallies, people are looking to sell rather than buy."

The rise in dollar/yen and softness in commodity prices should support lower yields, said Ken Fan, market strategist at

Paribas Capital Markets

. Dollar/yen was up 0.87 to 119.82 today, while the CRB Index closed up at 185.65.

"That should be positive for the bond market," Fan said. "But none of this, plus the recent decline of the

Nasdaq Composite Index

, seem to be able to support bonds. I think the reason is fundamental -- I think people probably believe in a tightening trend down the road."

The June fed funds futures contract closed with a yield of 4.80%, which indicates a slight bias toward higher interest rates in the coming months. For those who believe bonds will head lower, the light volume (

GovPX

volume was down 30% as of 3 p.m. compared to the average Thursday) and decline in interest after the rally are also discouraging.

"I think investors are very concerned abut Fed policy," he said. "There's an increasing number of investors who believe a fed tightening bias is imminent given a strong economy."