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Profit Taking Hits Treasuries

Treasuries Monday lost some of their safety premium from Friday's Karachi attacks and the slew of weaker data. Stocks extended their late short-covering rally from last week as well amid talk of asset allocation plays, which forced prices across the curve reluctantly lower over the session.

Ahead of the two-year auction announcement on Wednesday, uncertainty over the debt ceiling and its repercussions on supply also kept dealers sidelined. News of a more proactive Bush Administration stance on Iraq also may have helped the front-end outperform despite the weaker overall bias intraday. There was also talk about a European research report that the Fed would ease next, but it was given little credence.

The September bond closed down 24/32 at 103-05, while the two-year note and 30-year bond spread steepened three basis points to +355 basis points. San Francisco's Fed's Parry struck a balanced chord on the economy, highlighting downside risks to the economy from recent stock declines, but also holding out for growth to be bolstered by the stimulative policy mix and productivity gains.

The major stock indices finished at session highs, with the Dow up 2.25%, S&P 500 up 2.8% and the NASDAQ comp 3.2% higher. Looking ahead, Tuesday is littered with data; CPI, housing and weekly retail sales.

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