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Treasuries Post Sharp Losses

The markets re-priced for war Monday. Treasury prices plunged, while stocks and the dollar surged higher as it became clear that the window for diplomacy had essentially shut.

Comments from U.S. officials after the Azores summit Sunday, including Secretary of State Powell, and news that President Bush would address the nation Monday night and give Saddam a 72 hour ultimatum, added to expectations that an attack was only days away. Traders re-priced for a swift, successful strike against Iraq and a recovery in the economy.

The 10-year note dropped over a point in the day, resulting in a 14 basis point climb in the yield. Meanwhile, losses on the 2-year note were relatively contained, despite the unwinding of the flight-to-quality trade, as many expect the Fed will shift to an "easing bias" at Tuesday's FOMC meeting.

Meanwhile, a short covering rally boosted stocks significantly, with the Nasdaq closing up over 4%. The dollar also firmed as bears covered shorts. From MMS International

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