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Treasuries Exact Revenge on Stocks

Call it revenge of the bonds the day after the Fed's preemptive rate cut, for the cash yield curve steepened sharply and the Mar bond clawed back into the 105-handle. This came at the expense of equities, which ceded a fraction of their grotesquely large gains yesterday.

For most of the morning flow was limited to one shop buying 5K Mar 5s and some light selling of volume and buying of "puts" on the surging contracts at front end of the curve. But, a late slump in stocks on further earnings warnings in the retail and tech/software sectors returned Treasuries to form with additional impetus from more lousy data returns. Initial jobless claims jumped 16K, Non-manufacturing NAPM sank to 53% from 58.5%, and Challenger, Gray layoffs hit an all-time record of 133K which all heightened downside risk for tomorrow's payrolls report.

Factory orders rebounded 1.7% from a downwardly revised 4% drop in October. The California energy crisis also sparked a bid, adding to the gloom despite president-elect Bush's constructive meeting with Silicon Valley execs. Fed funds futures extended gains, pricing in 75% odds of 5% by end-June.

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