Treasuries Climb after Record Auction

Stocks market jitters and a record sale of two-year notes pushed Treasuries higher

It was a banner day for Treasuries Wednesday (more like a flag, actually), with rumors filling the data and events void and a brisk two-year note auction the fulcrum for gains in the latter half of the session.

The "classic" concession building process overnight ahead of the record $27 billion issue was interrupted by "nouveau" demand for the shorter maturities. Rumors of an explosion at the Empire State building in New York City vipered through the market, reminding investors of the pre-weekend terror warnings.

They soon withered on New York police reports that some manhole covers were blown down the street, but not before giving the curve a lift and sowing doubts in equityland after Nokia and JDS Uniphase warnings.

A convexity bid on 10-year notes, solid demand for five-year notes and a very strong 2.69 bid-to-cover on two-year notes kept the front and middle-maturities in the black.

A research desk also was rumored targeting a 6.1% unemployment rate in two week's time. Options were still dominated by roll activity on calls from June 10-year notes to September.

Swap spreads continued to narrow in anticipation of the $6 billion GE Capital deal to price Thursday. The June bond closed up 17/32 at 102-01, and the two-year notes and 30-year bond spread widened three basis points to +245 basis points.

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