Treasury prices stayed under pressure Friday after the stronger-than-expected GDP data quashed hopes that the Federal Reserve will cut interest rates again. The yield on the benchmark 10-year note jumped 14 basis points 5.33 percent, the highest level since Dec. 12.
At 2.0%, first quarter GDP doubled forecasts and its previous return in the fourth quarter. Final April University of Michigan consumer sentiment at 88.4 outpaced its preliminary result of 87.8, but came in shy of 91.5 in March.
Fed Chairman Alan Greenspan said that a range options were open on how to manage Treasury issuance, which could be always be jump-started in the future, if idled. He expected surpluses to continue to mount, debt to be paid down and non-government paper to be a good proxy.
The sharp break to end the week had most maturities flirting with April lows with a good chance to see further decay next week. The Jun Bond should test the 50% retracement of the May 2000-Mar 2001 rally at 99-16 at least next week. However, the recent lack of follow-through in both directions the past few weeks and heavily oversold stance implies bear will not be able to sit for too long with these positions.
The corrective flattening of yield curve should continue early next week as expectations for Fed rate cuts are scaled back and a heavy slate of agency supply hits the market. Allow the Jun Bond enough room to test 99-12/16 (200 week moving avg and 50.0% mark of the May 2000-Mar 2001 rally) or the Nov 2000 low at 98-06 before bottoming. The heavily oversold stance should yield a 6-10 week rebound from 99-12/16 back to a 104-105 handle. Jun 10s are vulnerable to 103-15 or 102-21 before managing a similar medium term recovery. Seasonal tendencies support this scenario.