The 13th was not a lucky day for Treasuries or equities Friday, with another overnight wave of hedge fund dollar liquidation disconcerting to the U.S. markets. Both asset classes shrugged off a deeper than expected decline in headline (-0.4%) and core (-0.3%) PPI, an additional drawdown in the inventory to sales ratio to 1.36 months and larger than expected U. Michigan consumer sentiment rise to 87. Symptomatic of rising U.S. risk aversion and thinning markets, the trade-weighted dollar set a fresh 2-year low below 104, while gold tested 3-year highs above $335/oz.
President Bush kept the geopolitical cauldron boiling, first warning N. Korea against restarting its nuclear program, then later outlining the plan for smallpox immunizations. Fedspeak entered the plot as well, with Fed Governor Olson not surprised by the run up in the rate of unemployment to 6.0% and acknowledging the economic "soft spot" was the reason for the Fed's "accommodative" policy stance.
News that housing agency Fannie Mae's A&L duration gap narrowed into positive territory was also thought to sap some of the bond's strength. The March bond closed down 28/32 at 110-1/32, while the two-year note and 30-year bond spread widened another three basis points to +309 basis points.