Bonds edge up on weak data

NEW YORK (CNNMoney.com) -- Treasury prices managed a modest advance Tuesday, trading thinly and reversing directions frequently on the last day of the first quarter of 2009.

Bond prices got just a slight lift from data about consumer confidence and regional manufacturing that were weaker than expected.

But gains were contained as investors reacted to the Federal Reserve's purchase of $2.5 billion in Treasurys on Monday, less than the $4 billion to $5 billion that was expected.

The purchase was part of the Fed's plan to buy $300 billion worth of Treasury debt over the next six months in an effort to drive down interest rates on consumer and business loans and help ease the credit crunch.

"This disappointment caused the weak long [bonds] to sell and pretty much killed the mood for the day," Kevin Giddis, managing director of fixed income at Morgan Keegan, wrote in a research report.

The Fed, which bought $15 billion in bonds last week, expects to hold two to three purchase operations per week over the next six months. It has bought $17.5 billion so far in bonds, and it also plans to buy $750 billion in mortgage-backed securities.

"Remain calm, all is well," Giddis wrote. "The big guy will show up with the cash. He is committed."

Tuesday marked both the end of the month and the end of the first quarter of 2009, which can lead to a volatile session, noted Bill Larkin, portfolio manager at Cabot Money Manager.

Confidence leads investors to take on riskier stocks, while fear drives them to safe-haven bonds. Stocks and bonds have mostly traded in opposite directions during the recession.

"In the bond market, it's people in the bunker who need bad news," Larkin said. "Even economic data that's in line with negative predictions will boost the stock market."

Bond prices: The benchmark 10-year bond rose 11/32 to 100 20/32, and its yield slipped to 2.66% from 2.7%. Bond prices and yields move in opposite directions.

The 30-year bond gained 31/32 to 99 12/32, and its yield fell to 3.5% from 3.6%.

The 2-year note rose 1 6/32 to 100 4/32, and yielded 0.8%, down from 0.86%.

The 3-month yield rose to 0.2% from 0.14%.

Lending rates: The 3-month Libor rate was 1.19%, down from Monday's level of 1.21%, according to Bloomberg.com. The overnight Libor rate spiked to 0.51% from 0.29%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

While the large jump in the overnight Libor rate is unusual, the month-end and quarter-end marker can lead to distortions, Larkin said, and it will likely normalize without continuing the trend.

Two credit market gauges narrowed Tuesday. The "Ted" spread fell to 0.98 percentage points from 1.07 points on Monday. The narrower the Ted spread, the more willing investors are to take risks.

The Libor-OIS spread slipped to 0.97 percentage points from 0.98 points. The narrower the spread, the more cash is available for lending.

Volatility in next two weeks: Friday's unemployment report and mid-April earnings reports from banks are expected to create a volatile start to the month.

Bonds will rise if banks report "lackluster but not totally disastrous" earnings, Larkin said, because investors will flock to the safe-haven market.

In Giddis' research note, he said he expects rates to move slightly lower: "Not dramatic, but not insignificant either."

The benchmark 10-year note yield could drop to 2.25%, and the 30-year bond yield would fall to 3.25%, he predicted.

Talkback:Have you bought a new car? Or are you holding on to your old vehicle? What would convince you to buy? Would you buy Detroit, or does the specter of bankruptcy push you to an import? E-mail realstories@cnnmoney.com and you could be part of an upcoming story. Your comments are subject to our Commenting Policy.