Bonds Creep Higher in Thin Trade

U.S. government bond prices rose slightly in a modest recovery from last week, when the market sold off on stronger-than-expected economic reports.

Volume was light during a session shortened for a day of mourning to honor former U.S. President Gerald Ford. Many trading desks were thinly staffed as financial markets were either closed or open only for a half-session on Tuesday, when the United States held a state funeral service for the former president.

That left Tuesday virtually devoid of economic data for bond investors. The Institute for Supply Management (ISM) manufacturing report on Wednesday and the monthly nonfarm
payrolls report, due on Friday could be major catalysts for the Treasury market.

"This is that sort of bounce that you get after the pounding the bond market took last week," said Kevin Flanagan, fixed income strategist for global wealth management with Morgan Stanley. "I wouldn't read too much into it and we are still at a kind of half staffed situation," Flanagan said.

Benchmark 10-year notes were up 3/32 in price for a yield of 4.69% from 4.70% late on Friday. Markets were closed on Monday for the New Year's Day public holiday.

"We don't really want to make much of the firmer action as no key levels were taken out and there was little sense of momentum developing or strong buying," said David Ader, head of
government bond strategy with RBS Greenwich Capital.

"For the week, the big number will be the employment report on Friday," said Don Kowalchik, a debt strategist at A.G. Edwards & Sons. If the jobs data surprises, the 10-year Treasury note's yield could test the upper or lower limits of its near term range, around 4.75% and 4.50%, Kowalchik said.

The 10-year note's yield, which moves inversely to its price, jumped to 4.70% at the end of December from 4.46% at the start of that month.

Last week, stronger-than-expected U.S. economic reports on home sales, consumer confidence and Chicago manufacturing weighed on bond prices as prospects of a Federal Reserve interest rate cut early this year appeared to dwindle.

Perceived prospects for the Fed to lower rates by June, as shown by short-term U.S. interest rate futures, had fallen to about 58% late on Friday after being fully priced as recently as Dec. 21.

Further insight into the Federal Reserve's thinking may come from the release on Wednesday of the minutes from its last monetary policy meeting on Dec 12.

Two-year notes traded 1/32 higher in price for a yield of 4.80% from 4.82% late on Friday, while five-year notes were 1/32 higher in price for a yield of 4.68% from 4.69 percent.

The 30-year bond rose 11/32 in price for a yield of 4.79 percent.