Treasuries Swoon

Those with long positions in bonds paid dearly for their skepticism on stocks and economic recovery

The bond market swooned as equities racked up big gains on a report that showed suprising strength in the services sector in November. Recent bond longs paid dearly for their skepticism on stocks and economic recovery Wednesday, with another round of more positive data grounds for investor euphoria. NAPM Services Index vaulted above the boom-bust line to 51.3 from 40.6 and new orders (+8pts) gained strongly in November. Challenger layoffs eased back to +181K for the month from +242K and even the Chicago Fed's national activity index was less negative at -1.7. Technicals played a starring role as well, with the NASDAQ comp decisively breaking above its 200-day moving average for the first time in well over a year, clearing 2000 and lifting the Dow back above 10K. The Mar bond spiked over three points lower (its old down limit), testing its Nov-27 low of 101-22 before closing off 2-13/32 at 102-19. Yet the heaviest damage was inflicted upon shorter maturities which had been priced for the perfect economic storm. 2-year yields backed above 3%, driving the price down half a point, below par. The curve flattened, with the 2s/30s spread slapped down to +229bp from +244bp as their safety premium all but vanished.

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