A solid bid for the jumbo $23 billion auction of two-year notes sparked a short covering rally across the Treasury curve, led by the front-end, which had backed up nicely into the record issue on Thursday.
Dealers had been skeptical that the large issue, thin market conditions and ponderous data due tomorrow would result in anything other than disaster. But the bid-to-cover ratio was a solid 2.4, well up from 1.51 previously, and the when-issued notes were awarded at 3.3% yield compared to 3.35% ahead of the auction.
The ensuing short squeeze ignited a broad rally; cash two-year notes closed up 7/32 and 10-year notes and bonds closed up nearly a point. Two-year yields tumbled 17 basis points to 3.08%, while the bond yield dipped back below 5.48% from the 5.55% area.
Thursday's data releases was mostly anecdotal, but also proved supportive. MBA mortgage applications sank, the help wanted index set fresh 37-year lows, and the ABC consumer confidence index fell to 6-year lows.
Stocks flinched as the bin Laden tape threatened America's existence again, while the dollar held up fairly well after light profit-taking.