Middle East conflict and diplomacy continued to tug and propel price action on U.S. assets, with the latest developments sideswiping stocks and fueling Treasury gains.
Prices at the front-end of the curve shot higher on confirmation that 13 Israeli soldiers had been ambushed and killed by a suicide bomber, reversing early losses set after the strong opener on Wall Street. This news eclipsed the more positive tone created overnight by the apparent withdrawal of Israeli troops from two towns in Palestine and the hopeful aura surrounding the arrival of Secretary of State Powell.
Risk aversion spread to the currency market as well, with the trade-weighted dollar dropping 0.75% to Friday lows of 117.50. 2-year notes rallied sharply into the close and beyond, their yield collapsing 10 bps to 3.41%. Bond yields tumbled six basis points to 5.66% and the two-year note and 30-year bond curve steepened five basis points to 224 basis points.
The June bond closed up 9/32 at 100-16, recouping a portion of Monday's losses. Energy prices gyrated wildly, but generally closed significantly lower along with the CRB's decisive break below 200. Fed funds and Euro$ futures surged.