Treasuries End Lower in Light Trading

The focus was on supply as the Treasury market geared down

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.

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