Treasuries extended last week's winning streak on Monday before succumbing to profit-taking amid heavily overbought conditions. Soft data, more dovish Fedspeak and initial sharp declines on stocks all contributed to day's gains, though prices closed off their highs after stocks mounted a late partial recovery. The personal income/spending duo were a shade lower than expected at +0.4%, +0.3% respectively, but it was the big hit taken by Chicago PMI which riled the markets.
PMI faltered below the 50 boom-bust line to 48.1 from 54.9 last time around, fanning fears that Tuesday's national ISM measure and even unemployment on Friday could follow with a repeat performance. The data and fears about the widening probe into the financial sector the New York Attorney General Spitzer contributed to the decline in stocks, which closed some 1.5-2.25% lower.
The December bond equaled its Sept. 24 high at 114-31, but closed up 17/32 at 114-09. The yield on the two-year note fell back below the Fed funds target for the first time in 11-months, dipping to 1.66%, while the two-year note and 30-year bond spread blew out over 10 basis points to +298 basis points, with the front-end powering ahead.
Bond fund manager Bill Gross of PIMCO called for a half point FOMC cut by the end of the year.