The penultimate trading session before the long holiday weekend was marked by lethargy and fatigue on Wednesday, with more dovish Fedspeak and issuance the main impetus behind corrective curve steepening. Modest bond buying featured prior to the launch of the upsized $7.3 billion Morgan Stanley multi-tranche deal and housing data, but soon fizzled after new home sales rose 5.3% and the Chicago Fed's National Activity index rebounded into positive territory.
Then it became a slow grind lower ahead of the $25 billion two-year note auction when, strangely, a concession appeared to be priced into long-end rather than short. Remarks from Philly Fed's Santomero saying it was too early to make a judgement on the policy stance and the economy needed time to evolve echoed the dovish tone of his peers McTeer and McDonough. This helped two-year notes firm after the as-expected auction results and prompted the two-year note and 30-year bond curve to steepen out another five basis points to 216 basis points.
June bonds closed up a tick at 99-1/32, while the cash curve was 5/32 under water on the bond and up 2/32 on two-year notes. Low volumes were spread across the asset markets.