Some of last week's safety premium was unwound on Monday in thin pre-holiday conditions and Treasuries drifted lower for the bulk of the data-free and events-lite session. Losses were compounded at the front end of the curve thanks to stock-market gains and the confirmation of a $26 billion 2-year note auction on Wednesday, an additional excuse for cheapening up the When Issued 2-year notes.
An upwardly biased set of data loom for Tuesday as well, which kept the market defensive. Third-quarter GDP is expected to be revised up to 7.8%; third-quarter corporate profits should hit stride at 13.1%; consumer confidence may jump 3 points, to 84.1; and existing-home sales should top 6.7 million units. Once the data dust settles, however, the downside bias may be limited by month-end demand.
The Lehman duration index will extend 0.19 years thanks to the healthy quarterly refunding this month. Outright flow was unremarkable, though a trio of shops sold more than 12,000 110 puts on March 10-year notes in an ostensibly bullish move. The December bond closed down 29/32 at 110-07, while the 2-year note and 30-year bond spread flattened 4 basis points to +316 basis points.
Eurodollar and Fed funds futures all declined with the shorter-dated issues, given the dip in risk aversion and coming data. The dollar rebounded 1.25% and gold sank 1.4%.