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Bonds get a welcome bounce
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February 9, 1999: 9:15 a.m. ET
Treasury prices regain their footing, while Japan yields help dollar stand firm
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NEW YORK (CNNfn) - U.S. Treasury prices climbed Tuesday as investors rallied ahead of the afternoon's $15 billion refunding auction and an anticipated weak opening on Wall Street.
By 9:00 a.m. ET, the key 30-year Treasury bond was up 15/32 of a point at 99-1/32, while the yield retreated to 5.31 percent.
Traders said the market was looking forward to an encouraging show of demand at the auction of 5-year notes later in the day, expecting the recent climb in bond yields in all maturities to tempt capital back into the market.
If the 5-year sale does well, traders hope the interest sparked could carry over to Wednesday's 10-year note refunding and Thursday's 30-year bond auction.
An expected pullback on Wall Street also should help the bond market retain its newfound and still fragile confidence. Airline nerves and an early retreat in overseas S&P futures trading indicated a soft open for U.S. stocks, giving bonds a window of opportunity.
Traders watching labor data
Although recent economic indicators have brought little but near-term gloom to the bond market, traders expect the 10:00 a.m. ET release of fourth-quarter productivity data to provide bond prices with additional mid-morning lift.
Economists have forecast the productivity release will show that U.S. labor worked even more efficiently in the last months of 1998, with hourly output rising 3.9 from 3.0 percent in the third quarter.
High productivity encourages demand for bonds and other fixed-income securities by enabling the U.S. economy to expand without forcing employers to hire additional workers, a factor that can unleash inflationary pressures.
An even more encouraging sign of "subdued but sustainable" growth without inflation could be unit labor cost data released with the productivity figures.
According to economists' estimates, the cost of doing business slowed even further in fourth-quarter 1998, even shrinking slightly. Consensus forecasts see unit labor falling 0.1 percent from the third-quarter increase of 1.1 percent.
The Japanese rate race
Yet another factor cited by traders for the Treasury rally is sliding Japanese long-term interest rates, which fell below 2.0 percent overnight as official comments there emboldened investors.
Because falling Japanese yields stem the recent flight to yen-denominated securities, traders said the Japanese bond market also was driving continued strength in the dollar.
The greenback held firm at 114.76 in early New York trading, creeping up from its previous close of 114.60.
However, traders noted that the U.S. currency is unlikely to make fresh progress in the absence of concrete developments in the Japanese bond market.
Instead, the dollar seemed set to drift near its current level, perhaps until a key Bank of Japan monetary policy meeting Friday.
Encouraging German unemployment data gave the euro a much-needed but short-lived boost against the dollar, lifting the European currency off its all-time lows to $1.1345 before profit-taking drove it back to $1.1323.
The German figures were especially welcome for the euro after Monday's industrial output data portrayed flat economic growth prospects ahead.
In recent weeks, the euro has retreated on trader fears that European economies are stagnating, which could in turn force a new wave of interest rate cuts. 
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