Treasuries hustled right off the starting line Tuesday thanks to morose equities and more suicide bombings in Jerusalem, but faded by the home stretch into the close. The news overnight that the Treasury had decided to delay its 2-year note auction announcement due to debt ceiling wrangling on Capital Hill had also elevated prices at the front-end on a scarcity trade. Robust May housing starts (+11.6% to 1.73 mln unit pace) and tame CPI (unch, +0.2% core) cancelled each other out somewhat and caused nary a ripple. They did somewhat polish the economic outlook, however, previously tarnished by weak retail sales.
Aside from the "stock trade," servicer activity mostly dominated, with strike roll-ups and vol selling on maturities of 10-years and lower. The trade weighted dollar index set fresh 16-month lows of 110.10, amid rumors that a West Coast real money fund was a euro buyer, perhaps to fund its growing European fixed income portfolio. At least four major investment banks pushed the first Fed rate hike into 2003. The Sept. bond closed up 3/32 at 103-07 in modest volumes, well off early highs of 103-27. The curve steepened two basis points to +257 basis points.
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