The Senate approved the $350 billion Bush tax cut plan, but this merely helped put a floor under weakened stocks, coming in at half its original size. The dollar set fresh all-time lows against the euro, weakening past the young European currency's launch level of $1.1747 to $1.1819. This distressed already suffering European stocks and enlivened bunds, helping backstop the bid in U.S. bonds.
Real money investors helped cement the foreign exchange move after the U.S. demonstrated ambivalence towards its currency and exporting disinflation. It was also reported that foreign central bank (BoJ) Treasury holdings jumped $20 billion in custody with the Fed in latest week ended May 21 -- a sure sign that covert intervention dollars were put to work in Treasuries.
The June bond ended up 4/32 at 121-09, while the 2-year note and 30-year bond spread narrowed 3 basis points to +292 basis points. The European Central Bank also warned that Germany could undergo a "short period" of deflation.