In the end, the markets got what they expected from Greenspan's Joint Economic Committee testimony, but little more. Yet, his latest reference to "minor" deflation risk set off another wave of curve flattening and fresh low yields before profit taking ahead of the long weekend.
Overall his perspective on the economic outlook appeared to be relatively hopeful, but the reference to "an unwelcome substantial fall in inflation" kept Treasuries guessing about the timing and extent of the next policy move. In fact, Greenspan confirmed that the Fed was studying the potential disruptive impact of lower short-term rates on money market mutual funds, which tilted policy risks towards the back-end of the curve.
Accordingly, the 2-year yield backed up 10 basis points after hitting the Fed funds target at 1.25% Tuesday, ahead of the 2-year auction announcement tomorrow. Greenspan's ongoing money market study also appeared to rule out an intermeeting cut. Meanwhile, the 30-year yield briefly tumbled 12 basis points to 4.28%, before rebounding. The June bond closed down 1/32 at 120-14 after rallying over a point to 121-16 contract highs. The 2-year note and 30-year bond spread collapsed 10 basis points, below +300 basis points for the first time in five months. Stocks recovered late in the session.