Treasuries fought hard against the data tide on Friday, digging their way out of an early deficit after a very volatile week. Prices have been struggling to find equilibrium ever since rolling over on Tuesday following the long weekend and asset allocation flows switching to stocks.
Though personal income was unchanged in April and consumption fell 0.1%, the latter was revised up sharply in March and the Fed's favorite inflation measure, the PCE deflater, fell 0.2% --favoring bonds. University of Michigan sentiment was revised down to 92.1, though Chicago PMI, a closely watched measure of manufacturing activity in the Chicago area, jumped to 52.2 from 47.6 in May. Selling resumed after PMI, but 61.8% support kicked in on 10-year notes and bond futures, along with a little month-end index-related demand. Some were also mulling Fed Governor Bernanke's speech on Japan Monetary Policy Saturday for any implications on the deflation trade.
The September bond closed down 3/32 at 119-07, a point above its lows, while the 2-year note and 30-year bond spread narrowed 3 basis points to +304 basis points. Late in the session the U.S. lowered its terror alert level to yellow, or elevated, keeping the cash market on the defensive. Leveraged sellers at the front-end (2-year notes through 5-year notes, and cash) were rumored to be getting a jump on selling in that area of the curve prior to the data.