Treasuries Close Mixed

The short end was stronger amid a near-flat change in inflation and weak industrial production data

It was a good day, and then a bad day for the Treasury long bond Friday, while shorter dated instruments outperformed throughout the session. The bond started the day in positive territory, helped by weakness in stocks and expectations of bullish data ahead. The data indeed obliged, as the CPI core printed a 0.1% gain, industrial production fell a whopping 0.8%, capacity plunged to 77.4%, and Michigan sentiment softened.

Treasury prices knee-jerked higher, led by the short end, as the recent combination of weak data, a sour Beige Book, and stock market declines significantly upped the odds of a 50 basis point easing this month. In fact, Fed funds futures priced in nearly 50-50 odds of a 50 basis point rate cut. Size call buying in Dec. euro$ was reported as well. But, technicals contained the upside (102-01 on June bond) and a recovery in stocks motivated profit taking into the weekend. The reversal in the bond extended the curve steepener (2s-30s) out to +170 basis points.

A late afternoon report that six Fed banks wanted a more modest 25-basis-point discount rate cut in mid-May also prompted traders to take cash off the table.

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