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Treasuries End Off Lows

Treasuries rounded out the FOMC week on a defensive footing Friday, sensing that the Fed was one step nearer the end of the easing cycle, and picking up no lift from the 1% decline on Wall Street. Still heavy with corporate (General Motors) and government (2-year) supply, prices along the entire curve buckled, though it also steepened as the front-end outperformed. Final U. Michigan consumer sentiment was revised higher to 89.7 from 87.2, though firm personal-income data was mostly in line with expectations.

The stronger consumer gauge help propel Treasuries deeper into their corrective funk. There was a little last minute recovery, but after a long corrosive slide traders looking for a little month-end and quarter-end demand to shore up losses were mostly disappointed.

With ISM and factory orders likely to rise early next week the correction could extend until payrolls induces some position squaring. Mortgage-related convexity hedge unwinding also contributed to the downside. The cash bond closed down 12/32 at 112-09, while the 2-year note and 30-year bond spread finished 5 basis points steeper at +321 basis points.

Expectations of another Fed cut slid to about 20% probability. The dollar continued to strengthen, while commodity prices enjoyed a broad-based rally.

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