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Treasuries End Higher

Another day, another auction. Treasuries staged an impressive supply-led rebound following a successful 5-year note auction only a day after suffering the agony of defeat on the 3-year sale. Data and events were scarce on the day, with only the 6.9% gain in the MBA mortgage application index to go on, leaving the focus squarely on supply and stocks.

Wall Street diverged after NASDAQ hit the skids following Cisco results overnight and news that Microsoft had not outrun its European anti-trust probe. NASDAQ closed over a percent in the red, while the Dow and S&P barely held on to the green.

The 5-year note auction enjoyed strong interest, with a bid/cover of 2.48 (compared to 1.3 for the 3-year notes) and $44.7 billion in bids for $18 billion in paper -- the highest since 1986. After the supply carnage on Tuesday, early talk that the 5-year note could be a happier affair helped Treasuries gain ahead of the results and afterwards.

Now the $18 billion 10-year note remains remains the final refunding hurdle, with perhaps more relief in store while stocks remain weak. The September bond closed 2-7/32 higher at 107-15, while the 2-year note and 30-year bond spread narrowed another 5 basis points to +348 basis points. Swap and agency spreads continued to narrow after last week's position-driven widening panic.

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