The first leg of a recession didn't occur with Wednesday's downward revision of Q2 GDP to 0.2% from 0.7%, but markets behaved as if it did. Stocks enjoyed a "relief" bid for about 10 minutes before falling prey to another wave of pessimism on growth and profits, which lifted Treasuries after initial profit-taking. The September bond closed up 20/32 at 106-06 and the yield curve flattened slightly as an upsized $14 billion in newly minted two-year notes had trouble being digested. Declining stocks fueled perception that reduced business spending would cut into economic growth and spark more interest-rate cuts from the Fed.
The bid/cover was a low 2.17, though total bids were on the high side. Rumors of the Bank of Japan checking dollar-yen prices and an Advisor report citing a line in the sand on yen strength at Y118.50 saw the pair crack Y120. But this was little help to the front end where the Bank of Japan parks its dollars.
On futures, new contract highs were set on five-year notes and 10-year notes, a lingering convexity and month-end index bid were said to remain factors. The 10-year bond/Treasury note yield spread crossed over into positive territory for the first time since April 1996, though the European Central Bank is not likely to alter this relative equation much with Wednesday morning's policy decision.
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