Treasuries put in a strong performance Thursday as mounting geo-political risks and ongoing concerns about the economy's strength provided a good excuse for profit taking on Wall Street. The focus was on Chairman Greenspan's testimony and President Bush's U.N. speech against Iraq. Though Greenspan's testimony was mostly on the budget, his remark that the ill-effects from September 11, falling stocks, and lower investment still linger weighed heavily on stocks. So did his acknowledgement that the Fed would likely lower its central tendency growth forecasts if it were to redo them.
Further downside pressure was applied as the President made a firm case for a regime change in Iraq. Declines of about 2.5% in the major equity indexes renewed the flight-to-quality into Treasuries, though the belly of the curve was the recipient of the flow. The short-end was capped by the limited potential for a September 24 rate cut, although Greenspan left the door open for the future. Meanwhile the long end was inhibited by concerns over rising budget deficits. Consequently the two-year note and 30-year bond spread was essentially unchanged at +271 basis points.