Treasuries recovered from Wednesday's lapse, rebounding Thursday ahead of the week's marque payrolls data and finally regaining the upper hand against dispirited stocks, which sank 1-2%.
The sole data release of initial claims fell 32,000 to 383,000, the lowest level in a year, but that result was dowsed by Memorial Day, seasonal distortions and the ongoing rise in continuing claims to 1983 highs.
Despite a lack of policy tightening from Europe early on (ECB, MPC, Riksbank) hawkish ECB remarks initially weighed on bunds but an economic consultant (Lisio) report that payrolls would be flat and the unemployment rate 6.1-6.2% helped spark bund and bond short-covering ahead of Friday's payrolls data.
Later, news that Bush would raise the post of Homeland Security to a cabinet level position and offer his latest thoughts on terrorism at prime time tonight helped rekindle the safety premium. The September bond rose a half point to 101-10, while the curve steepened one basis point again to +252 basis points on the two-year note and 30-year bond spread.
Parry of the San Francisco's Fed said he remained uncertain about the recovery, but that with the real Fed funds rate around zero, rates must rise when the expansion broadens.