The rebound continued Wednesday, with Treasuries chugging higher as asset allocation trumped a fresh round of supply. Stocks tumbled out of bed as investor complacency gave way to profit-taking, though the dollar remained fairly stable over the session. One large shop was heard selling S&P futures as well. News that the New York Federal Housing Loan Bank branch cancelled some dividend payments due to "credit risk issues" sparked some safe haven buying, though credit spreads generally narrowed.
The jump in crude oil following OPEC production cuts may have also fanned fears that commodity/energy prices could crimp growth ahead, rather than spark inflation. Fannie Mae priced $6 billion in 5-year and 10-year notes, which set up hedge lock unwinding, though mortgage servicers were relatively quiet, other than taking some profit on December bond calls.
The $25 billion 2-year auction went off without a hitch, awarded below 1.70% with a 2.20 bid/cover and relatively low non-comps. There was also little sign that foreign CBs had lost interest in the paper, despite dollar weakness. The December bond closed up over a point higher at 109-25, while the 2-year note and 30-year bond spread tightened 2 basis points to +342 basis points, and will drop 5-6 basis points further accounting for the "When-Issued" roll. Fed's Poole and McTeer were upbeat.