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Bonds Fall on Clouded Outlook

Dealings were pretty stagnant Wednesday following Fed Chairman Greenspan's Senate testimony Tuesday, though the theme of curve flattening led mostly by price weakness at the front-end prevailed. December business inventories somewhat backed up the chairman's view that while downside risks prevail, recession is a "low probability" event.

Inventories posted a smaller than expected 0.1% gain and previous months revised downwards, which suggested scope for a bounce back in growth in Q1. The March bond began the session in the green, clearing 104-15, but was eventually dragged under 104-00 by the sagging front-end and a 2% rally on NASDAQ.

Other Fed members chimed in today as well, striking a generally more upbeat chord on growth prospects in the latter half of the year. This kept the flattening trend in place, with losses concentrated in the 2- and 5-year sectors on the day, and another flood of corporate issuance choking the pipeline a bit and crowding underlying government paper.

Fed fund futures continue to downgrade risk of a 50-basis point Fed cut by the end of the quarter to 38%. The 2s/30s spread narrowed to +61 basis points.

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