ACTION ECONOMICS: Reactive Treasuries continued to respond to the bipolar moods on Wall Street, which initially managed to shrug off realized fears on Freddie Mac's weak earnings and write-off, before succumbing to fresh bearishness and losses. Data was limited to a dead-cat bounce on housing starts, mirroring the fleeting gains on stocks, while rumors about Countrywide's liquidity and more downbeat than expected growth forecasts from the FOMC minutes took a toll. Yields reversed sharply lower in line with renewed Fed rate cut hopes and the yield curve re-steepened sharply.

The 2-year yield dove right back down to lows near 3.12% before stalling, a drop of 13 basis points before rebounding to 3.17%. The 10-year yield plunged 7 basis points to 4.05% again, while the 2s-10s spread widened to +91 bp, before narrowing inside +89 bp. The decline in stocks and the dollar reinforced these moves.

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