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Treasuries End Lower

Treasury bulls lost their nerve with less than 24 hours to go before Fed Chief Greenspan's monetary testimony, shedding government paper in thinning conditions ahead of that key event and retail sales data just prior. The Washington Post and The Wall Street Journal Fedwatchers seemed to lean towards Greenspan favoring the positive economic developments over the deflation risks, which set up the market to fail Monday.

After starting off in a positive frame of mind, despite a healthy pre-market rally in stocks, investors folded up stale long positions in thinning market conditions. This exaggerated the fall, when locals strong-armed prices lower and tripped sell-stops on the way down to session lows. Options flows in the 10-year were also mostly bearish early in the day and provided early clues to the underlying fragility, for those vigilant for the signs.

There was some early selling of 2-year notes as well, which may have been elbowed by the launch of the jumbo $4 billion Freddie Mac 2-year global reference notes due to price Tuesday. The September bond closed 1-8/32 lower at 114-23, while the 2-year note and 30-year bond spread steepened 3 basis points to fresh 11-year wides of +343 basis points as reflation bets gathered fresh momentum.

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