After some rhetorical therapy from Fed speakers Thursday, the Treasury curve received a jolt from the sharp decline in August payrolls on Friday. Treasuries galloped higher, but prices at the front-end of the curve were lengths ahead by the close as stocks and the dollar caved in and risk aversion rose once more.
The eurodollar market exorcised any near-term risk of a Fed hike and dramatically scaled back risk of higher rates in the 2004-2005 contracts, where deferred contracts tumbled as much as 50-ticks in two sessions.
The yield on the 2-year note collapsed from 2.03% to 1.67%, 36 basis points on the week, while the 30-year yield sank from 5.37% to 5.18% -- 19 basis points. Consequently, the curve steepened sharply, with the 2-year note and 30-year bond spread vaulting 7 basis points to +348 basis points, a gain of some 23 basis points since the roll to the new 2-year note. The curve move was likely supported by the imminent auction of 5-year and 10-year paper next week, along with the President's push to make tax cuts permanent.
The December bond finished 1-27/32 higher at 106-22. Credit spreads also shrank thanks to the confluence of events leading to much lower yields, with U.S. swap and agency spreads closing in by 2 basis points to 3 basis points. The dollar sank 1.75% vs the euro, but held steady against the yen.