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Long Bond Rally Continues

Bonds took a round trip after a second day of initially explosive gains Thursday following the Treasury halting bond issuance, a historic plunge in the NAPM index to 39.8% and more unwinding of curve steepeners. The December bond notched another two-point gain and the cash bond a three-point gain, but fatigue finally set in and the December bond closed up 13/32 at 110-26 and the cash bond held on to just a one-point gain to 108-25.

In the immediate aftermath of NAPM, a -1.8% drop in personal spending and persistent weakness in construction spending, "system" accounts (model, technical funds) were good outright buyers of bonds. Curve trades played a lesser bid role too. The front-end and belly of the curve continued to underperform amid nagging worries about the shortened composition of growing U.S. debt. But, stocks gained 2-3%, climbing a wall of worry ahead of payrolls Friday following leaks of a government settlement with Microsoft and a sharp rebound in October auto sales thanks to 0% financing incentives. Fed funds futures moved back out to about 37% risk of a half point cut next Tuesday from 30%.

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