Treasuries exploded out of the gate and scarcely looked back Friday, capping off a very bullish week. Given the dearth of data, extreme risk aversion was the main catalyst that dowsed stocks and bolstered Treasuries. Hardening war rhetoric from the Bush Administration, rumors of an early release of U.N. Inspector Blix's weapons findings and a series of terror-related arrests in Britian, Spain, and Italy whipped the markets into a safety frenzy.
Amid the cacophony of war/terror noise, a fresh dollop of $2 billion five-year corporate supply from Citigroup created hardly a ripple, though there was a lot of option activity in the same maturity area over the course of the session. The U.S. also accused Iraq of plotting a scorched earth policy on its oil wells, if attacked and Nymex March crude shot over a dollar higher to $33.37 per barrel. This added further insult to injury on stocks, while only profit-taking took Treasuries down a peg by the close.
The March bond closed 26/32 higher at 112-12, off the best levels of 112-28 posted at the height of war fever. The two-year note and 30-year bond spread flattened one basis point to +322 basis point, perhaps the start of a set-up for the two-year note auction next week. The dollar tanked to fresh 38-month lows.