President Bush's intervention in the West Coast port dispute split the session two directions Tuesday, so far as Treasuries were concerned. The front-end lagged on Bush's slightly less war-like speech last night, but the bond gathered upside steam on a litany of rumors and credit concerns on the handover from Europe.
S&P downgraded Commerzbank and credit concerns continued to rile Germany's DAX, which fell 1.7%. The risk aversion baton was picked up stateside by corporate liquidity concerns in the banking, auto and utility sectors and various other unsubstantiated rumors. Oddly, it was the bond that benefitted the most, climbing nearly a point at one stage before retreating into the close as stocks recovered.
A German bank was coincidentally a large buyer of bond calls and New York Fed's McDonough sounded a little more hawkish than expected in remarks to the European Parliament. He felt policy was "expansive and appropriate."
Curve flattening received another push from Bush's intervention in the port shutdown, with the two-year note and 30-year spread closing three basis points tighter at +291 basis points. The December bond closed 3/32 lower at 113-27 after extending contract highs to 115-04. Agency and swap spreads widened on the credit concerns, while the dollar finished mostly firmer.