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Stock Strength Smacks Bonds

A bear market rally on stocks the day before payrolls proved too stiff a headwind even for skeptical bond dealers, leading to a modest unwinding of curve steepeners.

For stocks it was more a case of a letup in bad news, rather than anything overtly positive behind the 4% Dow and S&P rally and the 9% NASDAQ rebound, though Dell affirmed lower earnings, Lehman upgraded Yahoo, and Deutsche raised EBay.

Five Fed speakers covered the full spectrum from optimism on 2H growth to pessimism on business confidence, but none indicated readiness to move intermeeting. Perversely investors appeared to hope that jobless data tomorrow will be lousy enough to warrant a Fed cut before May-15, foreshadowed by an 18K jump in initial claims and 60% surge in Challenger Gray March job cuts.

The June bond slumped from session highs of 104-06 to 103-20 by the close, though 103-16 Friday lows still held up. Cash bond yields drove back above 5.50%, with options activity linked to the heavy tone at the long end as well. A West coast fund was rumored selling June 108 calls on 10s, continuing to hedge its sizable portfolio.

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