Treasuries Finish Sharply Lower

Traders continued to digest the Fed's rate cut, which was lighter than some Treasury bulls had hoped for

Treasuries were tarred Wednesday and feathered Thursday in the wake of confusion over the Fed's schizo policy statement. A dip in jobless claims, stock gains and a record dollop of corporate supply finished the job, with yields backing sharply higher for the second day running. First-quarter GDP was revised down to 1.4% (from 1.9%), but initial jobless claims plunged 22,000 to 404,000, sparking some hope that the economy was turning the corner on this lagging indicator.

Most Fedwatchers took the Fed's dovish line at face value that rates would remain low for longer than necessary while deflation remained a threat, but the bond market put Fed credibility in the penalty box for raising expectations via open mouth policy and then delivering a stingier cut. The shakeout from the ensuing long-squaring permeated the fixed income markets. General Motors priced a $17 billion multi-tranch issue, which preoccupied traders trying to meet strong demand while crowding out government paper.

The September bond closed 1-24/32 lower at 117-02, while the 2-year note and 30-year bond spread closed one or two basis points tighter at +316 basis points. Losses were most pronounced in the belly of the curve, due to mortgage-related negative convexity selling. Agency spreads tightened after Fannie Mae announced a debt buyback.