Treasuries made a valiant attempt at a comeback Tuesday after opening on a down-note thanks to Monday's stock rally, but squandered their recovery and finished at the low end of the session. Mixed Kansas City and Richmond Fed manufacturing indices indicated some regional disparity in that sector, but were pale surrogates for tomorrow's key retail sales data.
Fedspeak from Poole, Ferguson, and Bernanke was relatively expansive, but continued to tow the line on accommodative policy. Stocks vacillated ahead of tomorrow's data, but recovered by the close, which helped remove a fragile prop from under Treasuries. Another worry were frosty comments on weak Asian currencies ahead of President Bush's visit to Asia this week.
After rallying with stocks yesterday, the dollar stumbled hard against the yen back below Y109. Japan press alleged that Bush would warn Japan against foreign exchange intervention as part of his push for "fair trade" with the region. Bonds reversed lower on the inflationary implications and risk that Asian central banks could retaliate by trimming dollar reserve holdings.
The December bond closed 1-7/32 lower at 106-28, while the 2-year note and 30-year bond spread a basis point wider at +356 basis points. The benchmark 10-year yield backed above 4.35% from below 4.30%.