Two steps back, one step forward. Treasuries opened on the defensive ahead of key payrolls data after cracking key upside yield thresholds late Thursday, but managed to claw back after the data proved less onerous than expected to exhausted bulls.
Headline nonfarm payrolls fell 44,000 in June from a downwardly revised -72,000 in May, while the unemployment rate perversely sank to 6.2% from 6.4%. Personal income/spending rose 0.3%, while final U. Michigan consumer sentiment edged up to 90.9. ISM manufacturing survey gained to 51.8 from 49.8, but this was well below rumors of a rebound to 57.8. Auto sales also trickled through, on the firmer side.
Rumors of distressed hedge fund selling in the swap and agency markets as well as the euro$ pits kept trade spread product lively -- the biggest 2-day widening since the Savings & Loan incident. But given talk of an asset fire sale, this could have helped put a floor under Treasuries ahead of the quarterly refunding. Rumors included talk of a downgrade in the financial sector relating to derivatives or mortgages. The September bond closed up 11/32 at 106, well above 104-08 lows. The 2-year note and 30-year bond spread narrowed sharply (-13 basis points) to + 351 basis points as post-refunding bets weighed on the front-end.