So much for the concession. Late Tuesday the Treasury curve steepened sharply after the Treasury officially delayed the two-year note auction. Leading up to that announcement the curve was fairly inert and prices were mostly underwater as stocks staged a half-hearted recovery. But the two-year announcement combined with the late bludgeoning of Wall Street helped prices recover at the front-end and beat yields lower once again.
There have been indications that Congress could settle the debt ceiling debate by July 4th and President Bush has sent firm letters to bi-partisan leadership. Ironic, then, that prices firmed when the root cause of the auction delay is the deteriorating fiscal position. The start of the two-year FOMC meeting nearly went unnoticed, though swap spreads pushed out and damp home sales and confidence data had little direct impact.
The September bond closed down 2/32 at 103-06, sandwiched between 102-19 lows and 103-14 highs. The two-year note and 30-year bond spread finished five basis points wider at +261.5 basis points. The dollar had another rotten day after recovering somewhat with stocks overnight, with the trade-weighted dollar index tumbling back below 108, nearly two-year lows.