Treasuries posted a surprising rally on Friday with the September bond closing up nearly a point, albeit in fairly thin conditions. What was supposed to be a quiet range trade as players positioned for the upcoming FOMC meeting turned out to be anything but, as a combination of curve flattening trades, weakness in stocks, a safe haven bid, technicals, and short covering all combined to boost prices sharply, especially into the close.
The long bond opened the session with a bid, helped by profit taking on curve steepeners as some of the aggressive Fed rate cut expectations were taken off the table. The long end extended its gains as stocks weakened and as resistance levels were broken.
The real move was made at the end of the day, however, as news of terrorist threats in the Middle East, which put U.S. troops on high alert status, generated a swift safe haven bid in Treasuries and weighed on stocks.
Shorter dated treasuries, which had underperformed on the session, caught up to the long end, to leave the 2s-30s spread to close at +167 basis points. Short covering added to the hectic rally into the close.