Treasuries Ride Weak Data to Higher Ground

Bond traders hope weaker July retail sales on Tuesday will confirm a consumer spending slump, which could spur more interest rate cuts

The middle of the curve led the charge higher Monday, as yields tumbled further and prices gained, before a late rebound on stocks stole some thunder from Treasuries. Momentum from the Beige Book and PPI last week spilled over and two-year yields eased to within a stone's throw of all-time lows of 3.588%. Meanwhile, some dealers scrambled to not be left behind, should Tuesday's retail data confirm the Beige Book blues.

Five-year notes outperformed over the session, but gains at the long-end lagged, allowing the two-year notes and 30-year notes spread to widen to +185 basis points. The September bond planted its flag at a session peak of 104-17, but finished up merely 4/32 at 104-04. The only piece of second-tier data was the Kansas City Fed's July Manufacturing Output Index, which imploded -21 from June and -28 from a year ago. This was the lowest since the advent of the survey in October 1994, but a deterioration already well-documented in the manufacturing heartland.

The Nasdaq rally -- inspired by Goldman's upgrade of chip stocks -- initially fizzled, before a closing flourish. Also of note was French brokerage selling 5,000 "covered" December 109 calls on 10-year notes.

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