Treasuries made a valiant recovery Wednesday, amid heightened tension over an approaching U.S. repudiation of Iraq weapons disclosures and another weaker close on Wall Street. The curve steepened sharply, prodded by increased risk aversion and the more bellicose geopolitical tone. U.K. Foreign Secretary Jack Straw accused Iraq of "obvious falsehoods" in their documents, even as both the U.K. and U.S. continued with war preparations. There was also another wave of high profile arrests in not only France, but the U.K. and U.S. relating to terrorism and its financing. Secretary of State Powell also confirmed that the U.S. would make its case on Iraq disclosures on Thursday.
Risk averse crude oil spouted nearly a dollar higher, above $31/bbl before relaxing, while the price of gold topped $342.75/oz, for a $6 gain on the session. Rhetoric from Richmond Fed's Broaddus (non-voter) was uncharacteristically dovish, though he held out hope for an "accelerating" recovery into 2003. The March bond closed up 21/32 at 109-28, but it was the front-end and middle-end maturities that powered the move. The two-year note and 30-year bond spread advanced another three basis points to +319 basis points, as two-year yields fell 10 basis points to 1.74% and 30-year yields lagged with a three basis points decline to 4.97%.