Treasuries galloped out of the gate after a trio of friendly data releases fired the starting gun, but most contracts closed off their highs and the curve steepened slightly as Fed tightening expectations receded further over the horizon. Underpowered retail sales fell below the most pessimistic forecasts, sinking 0.9%, while PPI declined (-0.4%, -0.2% core). Both were weighed by the sharp decline in energy costs over the May month. Initial jobless claims gained 6,000.
Some leveraged selling ahead of the data was interrupted and sentiment swung quickly to the bid side. With cash yields of numerous maturities breaking lower through key psych areas (2s sub-3.0%, 10s sub-4.90%, bonds sub-5.50%), mortgage-related convexity buying continued to play a bullish role. The September bond closed up 12/32 at 102-19 after stalling ahead of 103, while the 2s-30s spread widened 2 bp to +252 bp.
Outright flows were "average," though 3 foreign firms were good (+5,000) buyers of 10s after the data. Several shops transacted option hedges for mortgage players, with whole herds of calls and call spreads reported going through on 10s. One large Mid-West bank was heard rolling call strikes on Septemer 10s up the curve in "size" from 106s to 108s.