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Treasuries Finish Lower

Treasury futures gapped lower Wednesday, following pre-market stock gains and catching up to their cash brethren, who eased further after the close Tuesday. But, bottom-fishing quickly kicked back in, intent on back-filling some of the gaps created by that early price action.

The curve maintained its corrective steepening path, despite the proximity of the 2-year note auction Thursday and the fresh ink on the $350 billion tax cut package. Data was friendlier than expected, but this appeared only to have a delayed impact once the neutral direction on stocks was confirmed.

Durable goods orders tumbled 2.4% in April, well below the -1.0% consensus, but were partly obscured by the war in Iraq. Much of the flow came via the options market, with early bearish buyers of puts on 10s and bonds, followed by some demand for calls as the underlying futures recovered. In related activity, mortgage servicers were rumored to have dumped about $1 billion in cash 10s -- likely unwinding of prepayment hedges.

The June bond closed 11/32 lower at 119-17, but well above its lows of 118-21. The 2-year note and 30-year bond spread gained another 4 basis points to +311 basis points. San Francisco Fed's Parry diminished deflation risk, but still sounded dovish.

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