Treasuries Finish Higher

A report of slower manufacturing growth dampened hopes for an economic recovery and boosted speculation that the Fed would leave interest rates unchanged

Deja vu, all over again. Stocks rolled over after another batch of poor data in July and Treasuries took full advantage of the situation, with the curve steepening once again to 9-year wides. Initial jobless claims jumped back up 20,000 to 387,000, giving a damp unemployment preview for Friday morning.

ISM manufacturing index plunged 5.7 points to 50.5%, barely holding above the boom-bust line. The third strike against stocks was the injury from a 2.2% drop in construction spending, led lower by commercial real estate, and insult from a deep downward revision of the May report to -2.0% from -0.7%.

The revisionism creeping into U.S. accounts, following evaporating GDP growth, Chicago PMI and consumer confidence this week was felt especially keenly by the front-end. Within 24-hours, 2-year yields plunged 29 basis points to 2.11% and the 2-year note and 30-year bond spread vaulted 11 basis points to +317 basis points. The September bond lagged, but closed up 10/32 at 106-09.

The dollar was trampled and its trade-weighted index fell back below 107 as its coupling with reestablished with down-trodden stocks. The recent corrective narrowing of swap spreads was also arrested, as were WorldCom execs.

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