Treasuries buried their head in the sand ahead of payrolls on Friday, after a positive opening following a two-decade high in U.S. productivity. Third-quarter productivity was revised upwards to a stunning 9.4% annual growth rate, though this was well flagged by the upwardly revised third-quarter GDP report last week. Standard & Poor's MMS predicts a 170,000 rise in November payrolls.
The inflation-dampening implications helped drive Treasuries to session highs. The MBA mortgage index also dropped 11.7%, thanks to a 19.6% drag from the refis. The surprising dip in ISM Services index to 60.1 from 64.7 proved supportive as well, though the gain in the employment index and still-healthy new orders took some varnish off.
Indeed, bonds ran out of gas by lunchtime and took on a more defensive tone in the afternoon. Stocks put in a solid performance before running out of momentum as well, with the Nasdaq composite index briefly clearing 2,000 for the first time in two years.
The March bond closed down 16/32 at 107-02, while the 2-year note and 30-year spread finished slightly steeper after initially flattening on the large productivity gain -- +1 basis point to +310 basis points. Eurodollars and Fed funds futures also appeared a little nervous ahead of payrolls -- first gaining, then finishing on the back foot -- with about 60% odds of a quarter-point hike by the first quarter of 2004, down from more than 80% earlier this week.