Following the quarterly refunding announcement, Treasuries enjoyed a relief bid as the package did not exceed the wildest expectations, but came in closer to the consensus at $60 billion. The front-loaded package consisted of $24 billion in 3-year notes, and $18 billion of both 5-year notes and 10-year notes, with no other obvious changes to the auction calendar other than avoiding sales on FOMC days.
There was little on the data docket, though the Fed published its Beige Book survey of economic activity, which it said "increased a notch" in June-July. Helping prices recoup Tuesday's losses, dealers quipped "mortgage hedgers finally took a lunch break." Volume was decent, but outright activity was lighter than during the previous sell-off. Bullish sellers of OTM puts on Dec 10-year notes and buyers of calls on September 10-year notes may have lent some support as well.
Dallas Fed's McTeer said he expected growth to accelerate to 5% in 2004, but did not see a need to end policy accommodation. McTeer said he wasn't happy to see yields back up, but said they wouldn't choke off the recovery. The September bond closed up 30/32 to 107-31, while the 2-year note and 30-year bond spread tightened 3 basis points to +361 basis points as the front-end underperformed on supply. Agency and swap spreads narrowed sharply after the European Central Bank downplayed recent sales.