Treasury Closing Summary (February 22)

It was a corrective type of day in the markets as investors did a double take on Greece's bailout and after some disappointing data elicited some further profit taking in equities. The markets are fearing next month's debt swap will trigger a credit event. Those concerns reignited demand for safety, while technical buying helped put a bid back into Treasuries as well. As a result, yields were knocked sharply lower, as was the case for German Bunds as well.

Greece reappeared on the headlines after Fitch downgraded its credit rating 2 notches to C from CCC, noting default is "highly likely in the near term." Fitch also warned it will lower the rating again to "restricted default" once the swap deal is completed. There are rising fears that the debt swap could trigger a credit event. Hence, Those actions weren't really surprising and had little overt effect on the markets, but they did underscore the difficulties still ahead for Greece and the eurozone and left a bullish tone in core bond markets.

Meanwhile, the day's data generally disappointed too, starting off with China's flash manufacturing PMI. Though it improved 0.9 points to 49.7, it remained in contractionary territory for a fourth straight month (seven of last eight). Also manufacturing and services PMIs from the eurozone came in weaker than expected. Subsequently, U.S. existing home sales rose only 4.3% to a 4.57 mln rate in January after a big downward revision in December. Poor earnings news from Dell also contributed to the downshift in stocks.

Treasuries benefited by the flow out of risk Wednesday. Dip buyers also supported the bond market in the face of the Treasury's $35 bln 5-year sale. Resistance near 3.25% held on the 30-year bond, and 2.08% held on the 10-year note. Traders and investors saw that as a buying opportunity. The 30-year yield sunk to 3.14% on the day, also supported by the NY Fed's Twist $1.8 bln buyback. The 10-year yield fell just below 2.00% again.

Reflecting the good demand for Treasuries on the day, the 5-year auction was solid, albeit average. The note was awarded at 0.90% right on the screws at the bid deadline, and only fractionally above last month's 0.899%. There were nearly $101.1 bln in bids for a 2.89 cover, well below January's strong 3.17, but in line with the 2.87 average. Indirect bidders took 41.8% versus 43.4% previously and the 42.9% average.

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