Treasuries Rebound to Finish Higher

Month-end demand and an as-expected report on manufacturing activity helped lift prices into the close

Treasuries recuperated with the support of month-end and quarter-end demand that helped levitate prices, particularly at the front-end of the curve. Stocks never gathered any upside momentum and the dollar lost some of last week's traction, allowing Treasuries to perk back up.

The sole data release, Chicago PMI, provided a bit of relief as well. Though the index rose a fraction to 52.5 from 52.2, this was right in line with expectations and proved no threat on the day. Economists also kept Tuesday's ISM forecasts (50.5) intact as result, which could help keep the market range-bound until the set-up for payrolls Thursday.

Flow was fairly light, though good buying in the belly of the eurodollar curve suggested long-time bulls padding their positions again after last week's corrective retreat. On the option front, there was some large (20,000) bullish call activity on Aug 10-year notes. The September bond closed up 22/32 at 117-10, while the 2-year note and 30-year bond spread steepened 3 basis points to +324 basis points. The 3-year note led the front-end higher, and the back-end caught up somewhat by by the close.

Fed funds and euro$ futures sustained a bid, but this did not aggressively alter expectations for another Fed cut, which marked time around 20%.

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