It was a random walk for Treasuries, which closed marginally higher Tuesday, with the stock market continuing to punch the bond's dance card. The curve steepened sharply as year-end risk aversion collided with a lack of upside follow-through on stocks and waning liquidity.
Data was mostly in line with expectations, as CPI rose 0.1% (headline) and 0.2% (core), while housing starts gained in November 2.4% from an upwardly revised October report. The long-end was torpedoed early on by initial dollar weakness and a pre-market gains on stocks, but a reversal on both counts later relieved some downside pressure. White House Press Spokesman Fleischer affirmed "strong dollar" policy in the absence of a confirmed Treasury Secretary after recent warnings by Japanese officials against yen strength.
A string of weaker than expected reports from Target, Best Buy, Circuit City and McDonald's later took some starch out of the Dow, which sank 1% and dragged the other indices lower. This helped shore up the March bond, which cut its losses and closed up 2/32 at 109-06. The two-year note and 30-year bond spread steepened another 5 basis points to +316 basis points. A little profit-taking left crude a few cents below $30/bbl, though API inventory stats could plunge tonight.