Treasuries recovered from early weakness and closed near their highs of the day as equities could not maintain their bid and slumped through the afternoon. With little else on which to focus (weekly retail sales and regional manufacturing figures were overlooked), Treasuries tracked the gyrations on Wall Street nearly tic-for-tic. Overnight gains in stocks had Treasuries on the defensive from the open, with the short end pacing the declines as some of the recent curve steepening/safe-haven trades were unwound.
A spurious rumor that Bin Laden had been found extended the early gain in stocks, which in turn pressured bonds further. But, there was no follow-through to the moves and the respective markets soon began to reverse. Unwinding of various rate locks also helped Treasuries sustain their bullish turnaround (GECC priced a $6 bln 2-yr FRN).
Short covering further added to the upswing in bonds as the 30-yr rallied through its recent range top at 97-10 (5.562%). The Treasury auctioned $39 bln in bills without a hitch, reflecting the ongoing demand for liquidity. The Senate passed a $450 bln increase in the debt limit without debate, but it is expected to have a much harder time getting through the House.