Treasuries held their ground Monday despite another up session for stocks, hinging more now on deflation than growth.
Follow-through gains from last week and equity weakness in Europe initially helped support Treasuries, particularly in the belly of the curve favored by the mortgage sector. But, U.S. stocks extended gains by 1% to 1.5%, led by technology and retail shares, tarnishing the Treasury rally by midday. In addition to mortgage-related demand on 10-year notes, 5-year notes enjoyed demand from Asian accounts overnight, with the cheaper dollar an inducement.
The dollar index plunged to 3-1/2 year lows after Treasury Secretary Snow acknowledged that the weaker currency helped U.S. exporters. It later recovered part way as some speculative dollar short positions were unwound.
The June bond closed up 18/32 at 116-27, after setting an fresh all-time high of 117-06, while the yield spread between the two-year note and the 30-year bond flattened 2 basis points to +321 bp.
Some caution appeared to be creeping in ahead of yield lows of 3.546% on benchmark 10-year notes, though the stakes rise on the downside breach of that level. Washington Post columnist John Berry entertained a 50 bp Fed rate cut in June, but Fed fund futures are pricing 75% odds of 25 bp cut by late summer.