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Treasuries Finish Lower

Wall Street maintained its stranglehold on the bond market Thursday, and solid gains kept Treasuries under pressure through the session. However, action was uninspiring as the markets seemed to lack the momentum of recent day. Unwinding of recent curve steepening trades dominated, as extended recent gains and as players reassessed Wednesday's rally, which was in part predicated on rumors of a 50 basis point easing on Tuesday.

Though the data had minimal impact, the numbers were nevertheless supportive of a flatter curve. The 0.2% and 0.3% declines in July PPI total and core were friendlier than expected, while the 15,000 drop in initial claims was on the bearish side of forecasts. The two-year note and 30-year bond spread narrowed about 10 basis point on the short end's underperformance.

Fed funds futures prices also gave back some of their premium as the market re-priced for a slightly less aggressive easing course from the Fed. As of Wednesday, the near-term contracts had reflected a little better than a 50-50 probability of a rate cut next Tuesday. But after having a night to sleep on those forecasts, the market reduced the risk to about 35%. End-of-year contracts, however, continue to be fully priced for a quarter-point easing.

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