The setback on Treasuries this week turned into a rout on Tuesday following the release of the consumer price index report, which registered a 0.3% core gain and temporarily squelched imminent deflation risks. This helped yields continue to back-peddle higher from recent historic lows as the probability of a second-quarter point Fed cut was pared further to 50%, from more than 70%.
Accordingly, Fed fund futures shed multiple ticks and bruised deferred euro$ futures closed 11-15 ticks lower. Housing starts added insult to CPI injury, gaining 6.1% to a 1.73 million unit pace in May, well above median forecasts of a 1.70 million unit pace. Industrial production (+0.1%) and Capacity Use (74.3%) came in right in line with the consensus. The data clinched an over one-point drop in the September bond to 120-19, while loses were most pronounced in the belly as unwinding of convexity hedges by mortgage institutions gathered momentum.
The 2-year note and 30-year bond spread, however, closed unchanged at +307 basis points as the wings of the curve shared equally in the pain. Treasury Secretary Snow reckoned the tax cut deserved credit for recent stock gains, spying a second-half recovery and improved jobs growth. Fed Governor Ferguson stuck close to the topic of Basel II capital accords.