u.s. bond report

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    Fundamentally, the move lower is being driven by recent increases in a number of commodity prices and strong economic data that has traders thinking about the possibility of inflation again, analysts said. The market is anticipating that the next move down the road by Federal Reserve policy-setters will be a rate hike rather than another cut.

    Technically, one analyst explained, the market recently made its first meaningful bounce after a six-week decline. But when this occurs, markets tend to eventually attempt to retest major lows. That's exactly what happened in Sep bonds today, as they fell by roughly three full points at one point and stopped just a few ticks shy of their Aug. 1 contract low.

    When the final bell sounded, the Sep Treasury bonds had lost 2 17/32 to 104 17/32, while Sep 10-year notes fell 1 23.5/32 to 110 16.5/32. The Sep 5-year note plunged 28.5 ticks to 111-15, with the Sep 2-year note retreating 7.2 ticks to 107-09.2.

    Fed Fund futures settled unchanged to 8.5 ticks lower across the board, while the Sep 10-year municipal note index fell 1 point and 2 ticks to 98-06.

    The Sep 10-year agency contract ended sharply lower, off 2 points and 11.5 ticks to 105-29, while the Sep 10-year interest rate swap gave back 2 points and 9/32's to 106-16.

    As for the fundamentals driving the market, "we're seeing signs that the economy is stronger than expected, and that there are inflationary concerns with the strength in gold and protein gold - corn, soybeans and wheat - this week," said R.E. McMaster, editor of The Reaper newsletter.

    Other commodities have also been firmer lately, such as energy prices, he continued. The Commodity Research Bureau Index got as high as 238.05 today, its strongest level since June 11.

    *** "The retail sales were stronger than expected, and that suggests the economy is recovering," said McMaster. "And the Fed has added a trillion dollars of money supply over the last year and cut interest rates 13 times (during the most recent easing cycle).

    *** "Investors are concerned a match has been lit in a barn full of dry hay. All of that is causing these markets to react fundamentally to the possibility of inflation and strength in the economy."

    Retail sales rose 1.4% last month, and sales excluding autos were up 0.8%, the government reported this morning. Consensus forecasts had been for a 0.8% to 1.0% jump in overall sales, with a 0.5% or 0.6% rise excluding autos. Furthermore, the previously reported gain in June retail sales was revised upward to 0.9% from 0.5%.

    "The bond market got another dose of (Fed Chairman Alan) Greenspan at the FOMC meeting yesterday and pretty much decided that there is more risk down the road of a rate hike than another rate cut happening again," said DeMarcilla. "That put the final touches on what has been a long decline."

    Technically, explained McMaster, Sep Treasury bonds had been stuck in a one-way slide from 123-03 on June 16 to 104-06 on Aug. 1, before finally getting a bounce to 109-05 late Friday.

    In fact, he added, it's possible the Sep bonds could slide as far as 97 to 98 before finding lasting support.

    "You'll have somebody coming in between 100 and 102, but I think the real support is 97 to 98," he said.

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