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Treasuries Finish Higher

was a roller-coaster session on Wednesday, with stocks and bonds trading places with velocity several times over the day. The front-end of the curve held its grip on the steepener, especially after rumors that a Washington-based advisor was predicting a 50 basis points Fed cut next week (that source later denied it).

Data was largely shrugged off, including trade prices, inventories and consumer credit. Otherwise the build-up to the record $18 bln 10-year auction proved to be a bust after the auction went extremely poorly amid low demand (lowest bid/cover since 1978). After the overnight equity rally flamed out, Treasuries surged initially, but then wilted into the auction announcement, before reviving once more into the close despite a late surge on Wall Street.

The September bond closed 22/32 higher at 107-17, but ran into a wall at 108. The two-year note and 30-year bond spread widened out six basis points to +324 basis points, helped by the dogged strength of short maturities.

Front-end gains were led by a buyer of 15,000 December euro$ futures on the Fed cut rumor, while the long-end lagged on the auction results. Fed fund futures priced in 68% risk of a cut by September.

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