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Bonds take rally in stride as prices rise with stocks

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The bond market appeared to ignore the stock rally Thursday as yields hung in the red for most of the session, shrugging off stronger-than-expected economic data.

Traders said prices, which move inversely to yields, have been under immense selling pressure over the last few days, but they are virtually unchanged year to date—a sign that the safe havens are basically tuning out all the noise in the market.

"It's been a fairly quiet few hours in the market. There wasn't much of a reaction to another sizable rally in equities," said Cantor Fitzgerald's Justin Lederer, adding that he expected to see prices hit harder given the recent gains in global stocks.

"It's been a very, very wild ride. We've seen heavy volume trading over the last few days ... the Treasury market has been following other markets for the most part," he said, referring to how bonds have traded off of news related to activity in emerging markets and movements in commodities, stocks and currencies.

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Treasury yields hovered near the flat line as the government capped off this week's $90 billion debt offering with a strong seven-year note auction. The Treasury Department auctioned $29 billion in seven-year notes at a high yield of 1.930 percent, the lowest since May. The bid-to-cover ratio, an indicator of demand, was 2.53, compared with a recent average of 2.44.

The benchmark 10-year Treasury note yield gave up earlier gains and was down about 1 basis point at 2.16 percent after the announcement. Seven-year note yields flattened to 1.89 percent and short-term maturities were flat as well.

Views were mixed going into the auction with the recent volatility, potential selling of dollars, month-end rebalancing and recent auction results, according to Lederer.

The share of indirect bidders, which include major central banks, was a 50.8 percent average, versus a recent average of 53 percent. Direct bidders, which includes domestic money managers, bought 14.2 percent, compared with a recent average of 12 percent.

Benchmark U.S. stock indexes rose about 1 percent in afternoon trading, with the Dow up about 100 points after gaining nearly 400 points earlier. Global markets were boosted as well, with major indexes in China and Europe rising more than 3 percent.

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Activity in the government bond market was light for most of the session as a slew of economic data indicated continued strength in the U.S. economy.

The Commerce Department said gross domestic product rose 3.7 percent in the second quarter, up from an initial revision of 2.3 percent. U.S. jobless claims also dropped for the first time in five weeks, while pending home sales for July remained virtually flat.

Symbol
Yield
 
Change
%Change
US 3-MO
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US 1-YR
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US 2-YR
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US 5-YR
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US 10-YR
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US 30-YR
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Investors are eyeing the Federal Reserve's annual Economic Policy Symposium in Jackson Hole, Wyoming, which started Thursday and brings together academics, financial market participants and many of the world's leading central bankers.

The event will be watched for signals as to near-term monetary policy action in the U.S., although many monetary policymakers are seen opting out, including Fed Chair Janet Yellen and Daniel Tarullo, a member of the U.S. central bank's board of governors.

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Wednesday's $35 billion five-year fixed-rate debt auction was met with the weakest demand in more than six years, while bidding for the $13 billion two-year floating-rate note sale was the lowest since December, according to Reuters.

—CNBC's Jenny Cosgrave contributed to this report.