Treasuries Finish Higher on Harsh Rhetoric towards Iraq

The safe haven bid was powered as the U.S. turned up the heat on Saddam Hussein again

Treasuries recovered from a brief drop in their safety premium Wednesday, only to come rocketing back into the green by the close. Overnight deployment of 24 U.S. bombers to Guam as a warning to North Korea, talk of a U.S. ultimatum on Iraq and the weak dollar supported prices early on at the expense of stocks. But soon the asset allocation shoe was on the other foot; a corrective wave took Treasuries lower after October low yields along the curve were probed and longs got cold feet ahead of the ECB tomorrow and payrolls Friday.

Relatively upbeat remarks by Inspector Blix and a strong front against a war resolution by U.N. Security Council members Germany, France and Russia appeared to stymie the war timetable. Prices came steaming back higher by the close, however, after Secretary of State Powell has some stern rhetoric for Saddam Hussein, saying that "Iraq has not made the strategic and political decision to disarm." The June bond closed 8/32 higher at 115-00, while the two-year note and 30-year bond spread steepened four basis points to +323 basis points.

The Fed's Beige Book said the economy remains "subdued" and that "geopolitical uncertainty" continues to restrain growth. Fed's Parry overnight said the Fed had plenty of ammunition. Freddie Mac priced a $3 billion five-year package.