Treasuries Finish Lower

The Treasury market ran out of steam into the close amid profit taking

Treasuries extended their post-payrolls rally into Monday morning, prodded by a "fast money" flows and Bin Laden rumors, but the bid soon evaporated and prices finished about where they began -- in the red. After last week's flood of friendly Fedspeak and data, there was little on either front. This held the market hostage to intraday forces, rumors and supply. Starting on the defensive after President Bush requested $87 billion in extra funding for Iraq reconstruction, Treasuries quickly turned higher midday thanks to leveraged demand and an ABC News report that Bin Laden had been cornered in a "40 mile" corridor in Pakistan. Risk of a retaliatory terror strike around the anniversary of September 11, however, was apparently behind the raised risk aversion.

Yet stocks and the dollar recovered their composure, aided by talk of mutual fund demand for stocks. Foreign interest in the 10-year note and duration-related hedge demand dried up by the close. Some were tempted to fade the curve steepener on both Treasuries and swaps, but it came back strong by the close. The 2-year note and 30-year bond spread widened 2 basis points to +350 basis points. The December bond closed 9/32 in the red at 106-12, well off session highs of 107-18. $29 billion in 5-year notes and 10-year notes will be auctioned this week.

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