Bonds Fall on Clouded Outlook

Greenspan's comments downplaying the risk of a recession weakened treasuries

Dealings were pretty stagnant Wednesday following Fed Chairman Greenspan's Senate testimony Tuesday, though the theme of curve flattening led mostly by price weakness at the front-end prevailed. December business inventories somewhat backed up the chairman's view that while downside risks prevail, recession is a "low probability" event.

Inventories posted a smaller than expected 0.1% gain and previous months revised downwards, which suggested scope for a bounce back in growth in Q1. The March bond began the session in the green, clearing 104-15, but was eventually dragged under 104-00 by the sagging front-end and a 2% rally on NASDAQ.

Other Fed members chimed in today as well, striking a generally more upbeat chord on growth prospects in the latter half of the year. This kept the flattening trend in place, with losses concentrated in the 2- and 5-year sectors on the day, and another flood of corporate issuance choking the pipeline a bit and crowding underlying government paper.

Fed fund futures continue to downgrade risk of a 50-basis point Fed cut by the end of the quarter to 38%. The 2s/30s spread narrowed to +61 basis points.

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