It was all systems go at the front end of the curve Thursday, relegating the weary bond to a damp finish. Curve steepening impetus first came from the latest tech warnings and layoffs (Compaq and Hewlett-Packard), but stocks staged an optimistic late rebound. Then a series of rumors and events drove the outperformance at the front end. There was chatter of a U.K. insurer going bust and weak U.K. GDP Friday, which sent short-dated U.K. and euro-zone rate futures higher. A S&P downgrade of Taiwan and a Moody's downgrade on Argentina also kept the global deflation story alive.
The 2-year note gained 5/32 to probe towards 3.9% yield, while the September bond closed down 1/32 at 102-27. There was persistent call and call spread buying on Euro$ futures, which was rumored related to hedging mortgage refinancings. December Euro$ probed 96-21/22 congestion. The coupon curve steepened to test +167 basis point July wides after malingering around +160 basis points for the last couple of sessions.
Tame 0.9% employment costs data, the 2.0% durables plunge and an auto retooling that distorted 366,000 claims were generally bullish, while the $1 bond buyback was overlooked.