Overnight action was a sign of things to come as large asset allocation trades were reported, with flows moving out of shorter dated government paper and into equities (the Dax closed up 7%). Wall Street followed suit, and the Nasdaq powered higher from the get go and closed up over 4.4%. There were also reports of size trades out of the front of the curve, with money going back into stocks. That reversed the bond market's impressive rally from Monday, and also helped traders set up for the $22 bln 5-yr auction. The yield on the 2-yr note soared over 18 bps to 2.09%. The yield curve flattened by over 10 bps on the day.
The first leg of the Treasury refunding, the 5-yr, turned out to be a non-event. The notes were sold at a record low yield, but results were tepid with a below-average 1.76 bid cover. Interestingly, Fed funds futures prices fell on the surge in stocks and the risk of a rate cut as soon as the August meeting fell to about 25% from 38% Monday.