After a lackluster session Friday, Treasuries rallied hard into the close, led by the intermediate area of the curve in an apparent asset allocation trade out of stocks. Speculation swirled surrounding Fed Chairman Alan Greenspan's semi-annual monetary testimony next week, contributing to the mood swing after the producer price index and trade data was shrugged off.
For the record, headline PPI rose a greater than expected 0.5%, but core sank 0.1%, lower than forecast. The trade deficit grew modestly to $41.8 billion from 41.68 billion. There were also vague reports on CNN and Bloomberg of a SARS outbreak at a Texas military base. The rumor that Greenspan would endorse the economic recovery Tuesday kept the bond defensive along with supply concerns, but that speculative talk was likely turned on its head by the close. There was some vol selling reported at the long-end ahead of the weekend and the speech.
Open interest continued to be drawn down on a number of contracts and dealing volumes were light while the market was in profit-taking mode. The Sep bond closed up 16/32 at 115-29, while the 2s-30s spread steepened 4 bp to +340 bp. Stocks held on to a near 1% gain, but crude oil surged as Tropical Storm Claudette approached the Gulf of Mexico. From MMS International