A trio of dovish Fedspeakers in combination with more solid data helped the Treasury curve steepen sharply Thursday, with just a day to go before key monthly payrolls data. A blistering revised second-quarter productivity surge of 6.8% and jump in jobless claims back above 400,000 molded images of a jobless recovery, while robust 1.6% factory orders gain in July and firm ISM Services index at 65.1 shaped expectations of the recovery gathering steam.
Fedspeak was the wildcard, however, that tipped the scales back away from Fed tightening expectations, with Bernanke, Parry and McTeer all ganging up to argue in favor of giving growth a chance. Architect of the Fed's dis/deflation policy, Bernanke even argued the Fed could still ease policy in the short run and acknowledged that some miscues between the Fed and bond market. 2-year yields broke 13 basis points back below the 2-handle to 1.87%, while the T-note yield eased 8 basis points to 4.50%.
With prices at the front-end outperforming sharply, the 2-year note and 30-year bond spread widened 6 basis points +341 basis points. The December bond closed up 20/32 at 104-28. Deferred contracts along the euro$ strip gained some 12-16 ticks, while agency and swap spreads continued to narrow as yields dipped. Stocks finished slightly firmer.