Treasuries Finish Lower

Pressure from both corporate and economic data, and more positive Fed comments, weighed on prices

Treasuries began Thursday's session ascendant on initial stock weakness, but soon foundered on a brace of stronger-than-expected data that brought forward Fed tightening expectations. Fedspeak also played a central role, with San Francisco Fed's Parry recanting his June dissent in favor of a deeper rate cut then and expressing optimism about the recovery. Parry also said that "accommodative" policy doesn't mean the Fed will hold rates flat.

Washington Post's John Berry also cited a number of economists looking for third-quarter GDP growth as high as 7.5%. Core CPI remained muted at 0.1%, business inventories slumped 0.4%, initial claims eased 4,000 to 384,000, industrial production rose 0.4%, and capacity use gained to 74.7%. But the capper was the Philly Fed index, which exploded to 28, from 14.6, beyond the upsized whisper number following a strong New York Fed Empire State manufacturing survey yesterday.

The front-end of the curve suffered the deepest losses, with liquidation of Fed funds and eurodollar futures, implying a rate hike as early as the first quarter of 2004. The December bond closed down 12/32 at 105-31, while the Treasury-note yield pushed back above 4.45% and the 2-year note yield surged 20 basis points to 1.92%. The 2-year note and 30s-year bond spread sank like a stone, -14 basis points to +338 basis points.

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