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Treasuries Finish Lower

The first trading day of 2003 was anything but happy for bond holders, with yields backing significantly higher and a mad scramble back into stocks as the new year dawned with a large uptick on December ISM to 54.7 from 49.2. Foreshadowing of this abusive price action came from the New Year's Eve reversal and also scant early reaction to the 13,000 jump in initial claims, back above 400,000.

From the get-go it was a story of new beginnings and a chunky opener for stocks, with optimism also fanned by the lack of terror events over the global holiday. Indeed, major indices broke back above their respective 50-day moving average lines after 3% gains. Bush also announced preemptively that his stimulus plan would be detailed next week. Two-year yields were initially affected most, surging 20 basis points from their record low close on the last day of 2002 to 1.78%. 10-year yields backed up 25 basis points to 4.05% and the cash bond yield climbed 20 basis points to 4.97%, having shed three points at one stage.

The curve initially flattened as some risk premium evaporated from the front-end, but the two-year note and 30-year bond spread closed two basis points steeper at +317 basis points. The belly underperformed. The March bond closed 2-17/32 lower at 110-04. From three-year lows the dollar rallied 1%.

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