With no data or events to speak of Wednesday, Treasuries focussed primarily on cheapening up the 2-year note ahead of the $25 billion auction. Even after that effort, the results were pretty tepid and the market remained soft. Thin conditions hampered the sale and the notes were awarded at 2.04%, above expectations, while the bid/cover was damp at 1.73 vs 1.87 on average. Also restraining trading volumes were the looming Wyoming speech by Federal Reserve Chief Greenspan on Friday; the end of the month; and the long weekend.
Directional assistance from stocks and the dollar was also lacking, leaving prices to drift lower amid indifferent trade. The 13.3% drop in the MBA mortgage index was hardly a surprise given the decline in refinancings, and the early news was little solace.
The September bond closed 20/32 lower at 106-09, though it managed to finish above session lows of 106-00. The front-end of the curve underperformed right in line with supply, while the 2-year note and 30-year bond spread ended 4 basis points flatter at +333 basis points.
Adjusted for the When Issued roll on the new 2-year notes, the spread will drop down to the +325 basis points area. Agency and swap spreads narrowed despite the weak tone on Treasuries, taking a break from recent widening on a rare day without any more negative government-sponsored enterprise press.