A preponderance of positive Allied gains in Baghdad over the weekend caught Treasuries on the hop on Monday, knocking them sharply lower initially before a late recovery materialized. Treasuries quickly dusted themselves off, however, mostly in a mirror image of stocks, which ran out of steam after an early surge out of the gate.
Dealers noted that unwinding of the war premium got a little ahead of itself following news that Saddam's cousin "Chemical Ali" had been removed with extreme prejudice from the periodic table of evil doers. Yet, news that the U.S. was testing at two possible chemical weapons cites, near Karbala and Baghdad, for sarin and other agents may have given stocks pause. Stocks shed the bulk of their early 2% to 3% gains. Indeed, while the weapons could provide the smoking gun for the Bush team, they also magnify the risk ahead. Pentagon's Meyers warned of tough road ahead as well.
The September bond closed down half a point at 110-24 after cutting its losses in half. The 2-year note and 30-year spread narrowed about 5 basis points from recent wides to +337 basis points. Volume was bid up amid some call spread buying on Jun 10-year notes, though one leveraged account appeared to leg out of long call position on the contract and into a bearish long put trade.