Treasuries could just not muster any gains on Tuesday, despite Wall Street wallowing in the red for most of the session. Trapped longs liquidated into rallies and the market behaved uneasily as if the trend on stocks remained north, notwithstanding a couple earnings "banana skins" from Texas Instruments and video gamer THQ.
Supply also provided headwinds for the curve, though the front-end recovered after cheapening up significantly ahead of Wednesday's two-year auction. Also potentially supporting the front-end was an alleged rehash by a Fedwatcher of dovish remarks from Boston Fed's Minehan on Friday, which prompted some late demand in front-month euro dollars.
President Bush also appeared to give an ultimatum that if the U.N. Security Council did not act on his most recent compromise resolution on Iraq the U.S. would act anyway. Amid lighter outright volumes, the main large option flow was a bullish seller of 10,000 puts on Dec 10-year bonds.
The December bond closed 11/32 lower at 107-23 and the two-year note and 30-year bond spread widened two basis points to +296 basis points.
Treasuries cut some of the deeper losses into the close and the March euro dollars rebounded two ticks to 98.13.
The Fed's Beige Book, Greenspan and two-year auction Wednesday may collar price action Tuesday night.