The Treasury curve narrowed on Friday as the market shifted its focus toward a less friendly outcome of Tuesday's FOMC and away from stocks (at least temporarily). Changing Fed policy expectations was a dominant influence in the market all week, and especially Friday.
Reassessment of the view that the FOMC could cut rates as soon as Tuesday helped the spread on the two-year note and 30-year bond spread to shrink back to the +300 basis points area from over +330 basis points at the height of rate cut frenzy earlier in the week. After pricing in about 52% chance of an August 13 rate cut, traders decided to take some chips off the table, with the futures market now showing only about 5% probability.
Interestingly, the market's re-pricing came on the same day that a major U.S. investment bank made the headlines by forecasting a 50 basis points rate cut on Tuesday. The long end was also boosted by convexity trades (and front-running of such), as well as friendly Q2 nonfarm productivity data. Productivity rose 1.1%, about double what was expected, while unit labor cost rose a tamer-than-expected 2.4%.
Stop loss buying also contributed to upide momentum as the rally took many traders by surprise. For a change, Treasuries didn't trade in lock-step with stocks.