You just can't keep a good bond down. Treasuries resumed their uptrend Friday after a record run to fresh contract highs and 45-year yield lows across many maturities as stocks fell.
The release of April CPI (unchanged core rate) did not have quite the same bang as the sharp drop in the PPI (-0.9% core) on Thursday. Still, this left core CPI at a water-logged 1.5% year-over-year rate, the lowest in forty years. Along with a steeper than expected 6.8% decline in housing starts to a 1.63 million unit annual pace, the data kept a bid in the long-end initially.
University of Michigan sentiment (93.2 vs 86.0) bucked the damp data trend of late and helped set up mid-session profit-taking on curve flatteners, which spilled over to long-end weakness. The market appeared to goad the Fed to ease ahead of Greenspan's testimony in front of the Joint Economic Committee next week, sharply boosting euro-dollar and Fed funds futures to imply about 70% odds of a late June cut.
The June bond ramped back up towards session and contract highs of 119-12 by the close, closing up 27/32 at 119-08. The 2s-30s spread widened back out 6 basis points to +310 bp, compared to week narrows of +300 bp and month wides around +330 bp.
The dollar remained defensive ahead of the G7 finance ministers meeting in France, which appears likely to be acrimonious.