Treasuries benefited from a low volume rally Monday, unwinding Friday losses following the Wall Street Journal article that the Fed would opt for a smaller cut and some jawboning on yields. More jousting in the press over agencies Fannie Mae and Freddie Mac and their accounting methodologies kept stocks defensive. In addition, terror threats in Kenya, Texas, and a potential floating tanker bomb in Greece all kept safety at a premium, with only a couple days to go before the FOMC decision.
Outright and option volumes were said to be very light, however, which suggested that upward momentum was not particularly compelling. In the data-free session, supply and technicals were dominant. The pricing of the $3 billion U.K. 5-year issue may have helped support the outperformance in the belly of the curve as hedge locks unwound. Rate futures held firm, though decent selling was reported into the rally on July Fed funds futures and September 2004 eurodollar futures.
Fed fund futures dropped to 52% risk of an extra cut. Agency spreads widened amid the bad press and an unflattering analytical report. The September bond closed up nearly a point at 119-17, while the 2-year note and 30-year bond spread traded a basis point tighter at +326 basis points. Talk of Japan investor selling of bonds and bunds kept the yen firm.