Treasuries posted a surprising rally Tuesday, seemingly undaunted by the impending Fed and Treasury announcements Wednesday. Instead, the focus was on a collapse on Wall Street as the key indexes fell over 3%. Shorter dated instruments outperformed. The yield on the two-year note dropped 20 basis points, overlooking expectations of a steady Fed policy stance Wednesday. Meanwhile, the five-year note shed about 20 basis points, ignoring concerns the Treasury will shift to monthly auction schedule. Helping to extend the gains was the 10-year note's break of 5%. The catalyst for Wall Street's woe was news of possible accounting skeletons in the closets of other high profile firms, including Tyco, Williams and Cendant.
Treasuries actually started the session well under water on rumors the January consumer confidence index would climb to 108 (from 94.6) and on a strong durables report (up 2.0%). However, Treasuries rallied on relief that confidence printed at only 97.3, proving the rumor false. Gains were extended through the afternoon as shorts covered, especially as equity losses deepened.