The Fed rate-cut debate was in full swing Thursday after a Washington Post article suggested an aggressive easing was more likely next week. Treasuries surged higher, particularly shorter-dated securities, repricing for the eventuality that the FOMC announces a 0.75% funds rate target next week.
The yield on the 2-year note fell over 8 basis points to 1.15%, while the July Fed funds contract priced in about 70% of the second quarter-point cut (having already fully priced for the first). While the short end paced the gains, the long bond lagged on the belief that the rate cut might be all the accommodation that is necessary and that the Fed may not have to employ unconventional tactics to fight off deflation.
The 2-year note and 30-year bond curve steepened dramatically on the combined effects, widening over 10 basis points to +325 basis points. Data helped as well Thursday as the rise in the Philly Fed index to 4.0 disappointed overly optimistic expectations of a surge to 25 (the whisper number). Stronger leading indicators data were overlooked.
Stocks were rattled by the data, as well as a downgrade on General Electric, and the better-than-1% decline in the major indexes further supported the rally in Treasuries.