Large price swings characterized bond market action in March with an average daily price move of 24/32 for the benchmark, 10-Year Treasury Note. Yet, though sweeping through a range of 38 basis points, the yield finished 10 basis points below where it began the month.

March began with three straight losing sessions that pushed the 10-Year Note yield up by 18 basis points to its highest closing level of the month. Part of the decline was due to profit-taking following strong gains made in the last two days of February that had pulled the yield down by 34 basis points to its second lowest closing level since mid-2003. The early price decline came despite bearish economic news, which normally provides a lift for the bonds market since it supports the case for more Fed rate cuts. It also usually undermines stocks, which makes Treasuries look more attractive by comparison.

The news included a contraction reading in the Institute for Supply Management's (ISM) index on the nation's manufacturing sector in February. In fact, the reading was the weakest in almost five years. The ISM also reported that its index on the non-manufacturing (services) sector showed a second monthly contraction of activity in February. Construction spending also reportedly declined in January, led by another sharp drop in the residential spending rate.

The comments from Federal Reserve officials in the first week of the month were mixed. Board Chairman Ben Bernanke said at a speaking engagement that mortgage delinquencies and foreclosures are likely to continue to rise -- an obviously negative economic development. But Philadelphia Fed President Charles Plosser stated that the monetary policy committee should be ready to tighten interest rates if necessary to keep inflation pressures under control,

But bonds rebounded on the first Thursday of the month as stocks took a nosedive on heightened credit market anxieties after it was reported that Carlyle Capital Corp. Ltd. and Thornburg Mortgage Inc. had missed margin calls from financial backers. In addition to the shift away from falling stocks, Treasuries benefited from their safety allure against the backdrop of credit risks elsewhere.

Treasuries got additional support the next day from a weaker than expected employment report for February. The report said nonfarm payrolls fell for a second consecutive month and February's was the largest decline since March of 2003. A somewhat mitigating detail was a decline in the unemployment rate, though this was attributed to a sharp reduction in the workforce.

That Friday, the Fed also took another step in its battle to keep monetary flows moving. One way to make funds available to banks is through direct loans from the Fed. The interest rate charged for such loans is called the discount rate and the Fed had been making cuts to the rate since August of 2007. But since borrowing directly from the Fed has been perceived as a sign of distress, many banks have been reluctant to use this source of funds. To address the situation, in December, the Fed began providing another direct source of funds. It instituted what it calls a Term Auction Facility (TAF), a temporary program whereby short-term funds can be obtained on an auction basis using a broad range of collateral including mortgage-related securities.

On the 7th of March, the Fed announced that it is increasing the amount of funds it auctions each month. The central bank also said that it is expanding its repurchase agreement operation so that more funds can be injected into the monetary system. The actions help ease credit concerns and have the effect of lowering borrowing rates. But traders were also wary of the move since it was seen as diluting the argument for continued aggressive cuts to the fed funds rate (the overnight borrowing rate for loans between banks).

The long end of the bond market got another boost the following Monday from yield curve positioning. Yield spreads had been widening and traders were anticipating a flattening reaction. The resulting maneuvering produced just such a flattening effect. Support also came from more losses in the stock market on negative analyst guidance on Citigroup and news that Countrywide Financial was under investigation by the FBI and that Lehman Brothers would be making large staff cuts.

But the Fed took more action on Tuesday the 11th which caused stocks to rally and Treasuries to plunge. The Federal announced that it was establishing a Term Securities Lending Facility (TSLF), which would allow primary securities dealers to borrow Treasuries from the Fed's account for a term of 28 days, using a variety of collateral including mortgage-backed securities. Previously, dealers could only borrow Treasuries from the Fed for one day.

The economic news released on the 11th also benefitted stocks. The Commerce Department said that the trade deficit was not as large in January as analysts had predicted. Moreover, several previous months' deficit figures were revised lower.

But Treasuries regained almost all of the losses the next day as the stock rally fizzled. Second thoughts on the projected effectiveness of the Fed's latest move and the lure to take profits following the previous day's spike (Dow up over 400 points), translated into another loss for the stock market and a recovery for bonds.

Treasuries moved lower the next day despite a reported decline in February retail sales that surprised forecasters who had predicted no change or a slight increase. In the morning, bonds had been up and stocks down -- not only due to the retail sales news but on word of a pending collapse of the Carlisle Group. But the stock market got a jump-start on a report from Standard and Poor's that said there will be fewer surprises in mortgage-related write-downs by financial institutions. After being down by over 200 points, the Dow recovered for a slight gain on the day.

The stock move was not the only negative for bonds. A weak reopening auction of 10-Year (actually 9-Year and 11-Month) Notes also weighed against the bond market.

Bonds recovered the next day on a tame inflation signal from the Consumer Price Index. The overall indicator of price changes at the retail level was unchanged in February. The so-called core index, which excludes the volatile categories of food and energy, was also unchanged. But a greater influence on the markets was the return of credit market concerns on news that Bear Stearns had severe liquidity problems and JPMorgan Chase and the Federal Reserve were working to provide backing for the company.

Bonds got a bigger boost the following Monday. In a surprise move, the Federal Reserve had conducted an unscheduled and highly-unusual Sunday meeting and decided to lower the discount rate by 0.25% from 3.50% to 3.25% -- just 0.25% above the fed funds rate prevailing at the time. In addition, the FOMC created a temporary (though extendable), short-term lending channel to primary securities dealers in order to shore up the credit market. The actions were triggered by the foreign market's reaction to news that JPMorgan Chase was buying Bear Stearns.

But bonds tanked on Tuesday, the 18th. The inflation data was not helpful for either market. The Producer Price Index, a gauge of inflation at the wholesale level, rose as expected in February, but the core increase was the largest since November of 2006. Yet, stocks were lifted by better than expected earnings reported by Goldman Sachs and Lehman Brothers. And stock traders apparently approved of the results of the day's regular monetary policy meeting. The committee lowered the fed funds rate by 0.75% to 2.25% and the discount rate by 0.75% to 2.50%. The policy statement noted the weak economy and troubled credit conditions but that uncertainty over inflation is also a cause for concern. However, a nod to possible further tightening was provided by the comment that "downside risks to growth remain."

The exuberance in the stock market pushed the Dow up by 420 points. The stock shift and lowered safety flow into bonds because of the Goldman Sachs and Lehman Brothers news sent Treasuries sharply lower. In addition, the bond market was poised for a technical retreat following the strong gains made in the previous two sessions. And commentators noted that some bond traders were disappointed that the Fed rate cuts were not deeper.

But the surge in stocks led to profit-taking the next day and Treasuries rallied. The Dow gave back over half of the previous day's gain and the benchmark 10-Year Treasury Note regained almost all of its previous day's loss.

Bond traders took a breather on Thursday the 20th despite a rebound in stocks that almost recaptured the previous day's losses. The technical nature of the action could be seen in the fact that the economic news released that day was decidedly bond-friendly. The jobless claims report said that initial claims were sharply higher in the preceding week, the Index of Leading Economic Indicators for February fell for a fifth consecutive month, and the Philadelphia index on the region's manufacturing sector for March indicated a fourth consecutive monthly contraction of activity.

Following the three-day Easter break, stocks got another boost on news that JPMorgan was upping its offer on Bear Stearns by a factor of five. A surprise increase in the pace of existing home sales reported for February also favored stocks. The influences sent Treasuries into a tailspin that pushed the yield of the 10-Year Note up by 23 basis points in one day.

Bonds recovered somewhat in the next two days, helped by weak economic data and retreating stocks. The Conference Board said that its Consumer Confidence Index fell to a five-year low in March. The Commerce Department said that durable goods orders declined in February -- a surprise to forecasters who were looking for a bounce after a drop in January. And the Commerce Department said February's rate of new home sales declined.

Treasuries fell once again on the 27th as the Federal Reserve conducted its first TSLF auction and demand turned out to be weaker than expected. Bond traders saw this as meaning that credit may not be as tight as previously thought. The market was also under pressure from the regular monthly Treasury auction of 5-Year Notes.

But stocks continued to slide and Treasuries made solid progress on the 28th. Some late-month and quarter portfolio reshuffling also helped lift the market. This is the process whereby fund managers adjust their holdings on the basis of such characteristics as yield, risk, and return horizon. Since Treasuries have a fixed maturity and have no credit risk, they are used as adjustment instruments and the rebalancing process usually entails their purchase.

The portfolio adjustments continued to support the bond market on the last day of the month.

Housing :

The housing indicators released in March were mixed but still indicated general weakness in the sector. In the report on construction spending for January, the Commerce Department said the seasonally adjusted, annualized rate of spending in the residential construction category fell for a twenty-third consecutive month to its lowest level since May of 2003.

In another report, the Commerce Department said the pace of housing starts slipped in February but it would have represented a sizeable monthly increase if January's rate had not been revised sharply higher. However, the stronger than expected starts figures did not change the near-term outlook for new construction. This was because the rate of building permit issuance fell in February for a ninth consecutive decline to its lowest level since September of 1991.

According to the National Association of Realtors, the rate of existing home sales actually rose in February after six months of declines. In fact, the reported rise was the largest in a year and the pace was the highest in four months. Inventory levels declined, pushing the turnover rate down to its lowest level in six months.

But existing home prices continued to slide. Both the average and median prices were lower in February than in January and they were both well below where they stood a year earlier.

The rate of new home sales declined in February for a fourth month to the lowest level in thirteen years. Inventory levels declined for an eleventh straight month. Unlike existing home prices, those for new homes rose in February. They were still lower on a year-over-year basis, though.