Treasuries Finish in the Red

Treasuries fell on the encouraging economic picture, and more positive comments from the Fed

Treasuries continued to lose their footing Wednesday as data outperformed expectations once again. While headline retail sales data for September came up 0.2% short, sizable back-revisions in October knocked the wind out of bonds. A record gain in the New York Fed's Empire State manufacturing index to 33.7 in combination with the first positive showing in its employment component in a year also added insult to injury. Later, the Fed's Beige Book regional economic report card noted the pace of the economic expansion had "picked up," with several districts even reporting improving hiring trends.

Outright flows were relatively light, though the bond was down over a point at one stage and 10-year yields nearly broke 4.45% before settling lower. Over the past couple sessions there were rumors of large liquidation in euro$ futures, including 27,000 June 2004s and 10,000 March 2004, as Fed tightening expectations were brought forward.

The curve flattened as a result of the front-end underperformance, with the 2-year note and 30-year bond spread bowing 4 basis points to +352 basis points. The December bond closed down 17/32 at 106-11. At one point, rumors of hedge fund "troubles" appeared to get the attention of stocks, but the talk had little traction with bearish Treasuries.

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