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Treasuries Plunge as Safety Bid Wanes

Treasury yields jumped sharply higher in a very sloppy Thursday trade. Unwinding of the war premium again took a heavy toll on Treasuries in another rumor-driven session. Talk circulated overnight that the CIA was negotiating with Iraqi military leaders and that Iraq would report on anthrax/VX soon. There were also rumors of a coup d'etat.

Meanwhile, word that President Bush was willing to delay the U.N. vote suggested a move toward increased diplomacy. Those factors put Treasuries on the defensive and longs scrambled to liquidate. Market contacts reported large asset allocation trades from leveraged accounts out of Treasuries and into equities. The 5-year underperformed and the yield jumped over 18 basis points. The curve continued to flatten, with the 2-year note and 30-year bond spread coming in another 5 basis points from Wednesday to +313.5, and 18 basis points since Monday.

Concurrently, the hopes for a "better case scenario" out of Iraq provided strong upside momentum to an oversold equity market and a soft dollar. The Nasdaq closed up 4.8% while the dollar had its best day against the euro in over seven months. The economic data were again largely ignored. Retail sales fell a deeper than expected 1.6%, and ex-autos component dropped 1.0%.

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