Treasuries and stocks both made the best of another bad slug of data Tuesday, chalking up gains on hopes that the Fed may be bounced into easing more aggressively in line with Fed funds odds. Accordingly the coupon curve steepened sharply, as the spread between the 2-year note and 30-year bond widened to +173 basis points from +167 basis points. Two-year yields sank to Oct. 1998 lows of 3.77% -- pricing in something less than a stellar economic outlook.
Income (+0.3%) and spending (+0.4%) patterns remained upbeat in June, but erosions in consumer confidence (116.5) and Chicago PMI (38%) suggested that the economy is still groping for a bottom. Though some economists held fast to median expectations of NAPM data at 44.7%, which will be released on Wednesday, the risk may be lower.
Month-end and technicals played a role too, as the decisive break below 3.8% yield (on closing basis) sent shorts scrambling again when 3.77% Oct. 1998 lows approached. The September bond blew through offers at 103-30 as the short-squeeze gained momentum, grasping the 104-handle into the close. Inaugural one-month bills were the belles of the ball amid the deflationary global backdrop, awarded at 3.59%.