Treasuries beat a path broadly higher Tuesday as risk aversion and de-leveraging continued to hammer away at equities. Investor anxiety was elevated by rising tension on the Indian sub-continent, anthrax testing at the IMF, and a warning by New York authorities about terror risks to key NYC monuments on Memorial Day weekend (following Bush administration warnings of increased communication traffic by suspected groups last weekend).
Early flows bid up the front-end of the curve, while the belly and long-end later played catch-up due to demand from CTA accounts after dovish comments from Fed VC Ferguson. He struck an equivocal tone on the strength of the U.S. economic recovery, saying "questions remain on business investment and future consumer spending."
Option flows and aggravated stock weakness backed up the bid tone on Treasuries, with call buying on 10s and vol bid higher. The Jun bond finished strongly, up 14/32 at 101-9/32, while the 2s/30s yield gap steepened initially 5 bps to +245 bp before throttling back to +243 bp. The yen strengthened sharply below Y124 and along with fresh gold highs of $317/oz. suggested de-leveraging activity.