Rate Hike Fears Hit Treasuries

The market had second thoughts about the Fed's rotation to neutrality Wednesday

Treasuries had second thoughts about the Fed's rotation to neutrality Wednesday, suffering further from well-timed rumors about the Fed pulling the trigger on a half point rate hike as soon as May. The curve flattening trend resumed mildly, with the policy-sensitive front-end revealing its vulnerability to the rumors and policy bias-creep.

The synchronous plunge by stocks was little solace for bonds, nor was the story that PIMCO bond fund manager Bill Gross levelled accusations at GE for its handling of the recent $11 billion issue and its use of over-leveraged commercial paper financing. Dealers said the rebuke cast a cloud over the market, also curdling the spirit of stock investors. A Washington-based consultant was credited for the Fed rumor, though most derided the report as merely a rehash of Fed funds futures targets.

Bonds initially showed remarkable resiliency to very strong home starts, which nailed 2.8% gains in February on top of upwardly revised Jan data. But, the June bond closed down 26/32 at 97-31/32 and the cash bond shed a point.

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