Treasuries jumped the gun Tuesday, rallying hard with a day to go before the Fed renders a decision on the funds rate Wednesday after 2:15 p.m. EST.
A precipitous drop in consumer confidence and its key sub-indices suggested that Greenspan's "fabric of consumer confidence" has been violently torn apart, elevating the risk of an outsized Fed cut Wednesday. Headline data fell to 114.5 in January from 128.6 and expectations plunged to a recessionary 77 from 96.9 -- the lowest since October 1993.
Fed fund futures rallied sharply and began to price in the 20% risk of a 75-basis point cut Wednesday, which was duly noted by one infamous Fedwatcher and also former Fed governor Heller. This sent the March bond up through stops above 103-01, then above the 103-11 trendline, which confirmed "double bottom" on the charts.
Buying resumed through the 103-15 50-day moving average, before a high-volume run at 103-19/20 and selling above capped the rally. Convexity-related demand also prompted demand for 10-year cash, which briefly topped 104, while the cash bond closed 1.5 points higher.
Sales on-the-fact is a slight risk Wednesday, before buyers return.