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Treasuries Advance as Producer Prices Fall

A number of yield milestones were hit this week, after dispiriting data and a somber Beige Book report helped the curve wade through the $27 billion Treasury refunding and the rising tide of corporate issuance. Two-year yields probed 1993 lows below 3.7% after breaking back below Fed funds at 3.75% and Oct 1998 3.77% crisis lows.

The 10-year dabbled below 5.0% and the cash bond dipped in a toe below 5.50%, eying the 5.442% (99-00) April 6 peak. The 2s/30s coupon curve steepened to wides of +182 basis points as NASDAQ reverted back to late April levels. On Friday, the September bond was confounded by a deep 0.9% decline in the headline Producer Price Index and a 0.2% rise in core, but closed up 11/32 at 104-00 on the dot, making up for Thursday's losses.

Pricing of Countrywide Credit ($1 billion) five-year notes and Freddie Mac ($5 billion) three-year bonds briefly boosted the middle of the curve, though the late equity rebound cooled it off.

The dollar stabilized somewhat, but fixed income dealers kept a nervous vigil. Merrill Lynch recommended increasing the duration on global bonds, while several other shops lowered their Fed funds target another notch. PIMCO talked up the front of the euro curve.

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