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Flight to Quality Trade Boosts Treasuries

Another flight to quality trade boosted Treasury prices Thursday as weak manufacturing data and more rolling blackouts in California heightened expectations that the Fed will chop another 50 basis points off the target fed funds rate this month. Short and intermediate dated paper paced the decline in yields.

Though the bond market extended Wednesday's gains overnight on news California Gov. Davis declared a state of emergency, stronger than expected data on housing starts and initial claims gave the market pause. The onslaught of supply was also a factor that left Treasuries heavy early on. But with California looking to go black again, and reports of more defaults by the two beleagured utilities, the bulls regained control.

Eye-popping weakness in the Philly Fed data added to the momentum and restored calls for a 50 bp Fed move. The Philly Fed

index fell to -36.8 from -4.2, its lowest level since 1990 when the economy was in recession.

Fed funds futures soared and are again pricing in some 90% probability of a 50 bp easing this month. Technicals extended the day's gains.

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