There was little on the data docket, though the Fed published its Beige Book survey of economic activity, which it said "increased a notch" in June-July. Helping prices recoup Tuesday's losses, dealers quipped "mortgage hedgers finally took a lunch break." Volume was decent, but outright activity was lighter than during the previous sell-off. Bullish sellers of OTM puts on Dec 10-year notes and buyers of calls on September 10-year notes may have lent some support as well.
Dallas Fed's McTeer said he expected growth to accelerate to 5% in 2004, but did not see a need to end policy accommodation. McTeer said he wasn't happy to see yields back up, but said they wouldn't choke off the recovery. The September bond closed up 30/32 to 107-31, while the 2-year note and 30-year bond spread tightened 3 basis points to +361 basis points as the front-end underperformed on supply. Agency and swap spreads narrowed sharply after the European Central Bank downplayed recent sales.