Treasuries Finish Mostly Lower

Greenspan's relatively mild outlook for the economy sank Treasuries, but longer-dated issues outperformed amid war concerns

Treasuries rounded out a rollicking week Friday on relatively solid footing, while stocks attempted to dig in at key chart levels. The curve flattened, with a little near-term risk aversion coming out of the marketplace vis-a-vis Iraq deadlines, dominating the holiday-thinned trading scene. In a speculative-driven move, the long-end outperformed and traded in the green for most of the session, while the rest of the curve lagged in the red. The two-year note and 30-year bond spread narrowed three basis points to +316 basis points, with two-year yields briefly backing above 1.78% from below 1.70% Thursday and the 30-year yield dipped below 4.90% from 4.93%.

While there may have been some attempt to cheapen up next Monday's $27 billion two-year auction, corrective curve flattening was mostly to blame. Fedspeak was relatively dovish, stocks held their own, and the war premium temporarily subsided. Dealers were braced for some profit-taking Friday after failures to make new highs overnight, but the March bond completed a "material breach" of a three-month wedge (110-30) and closed 3/32 higher at 111-00. In the past 24-hours Fed hawks Broaddus, Poole and Stern all sounded fairly dovish, while Chairman Greenspan did not appear to be in any rush to hike rates after elaborating on deflation. On Thursday evening he said the economy is emerging from a "soft patch," which damping demand for fixed-rate government debt Friday.

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