Treasuries completed a round trip on Thursday, closing down after a failed run to the topside. Following a round of firmer data, heaviness was pronounced at the front-end after the FOMC minutes revealed that the small rate cut on Dec. 11 was seen as an "insurance move" which could be quickly taken back. This drove cash yields up 8 basis points to 3.14% and preyed heavily on the belly of the Euro dollar curve which had room to adjust to end of the easing cycle.
Initially there was some curve play at the front-end of Treasury futures, with sales of two-year notes rumored against five-year notes by several shops. At midday prices took off amid a flight to quality on rumors that two Japanese banks would declare bankruptcy tonight. This was compounded by a two-figure move on dollar-yen from Y133 to 135 after a decline in popularity reported for Prime Minister Koizumi and later harsh words from U.S. Treasury Secretary O'Neill on the Japanese economy. But this merely set up Treasuries for a fall and the March bond closed down 11/32 at 102-28, and the two-year note and 30-year bond spread narrowed 8 basis points to +228 basis points.
Stocks and the dollar closed strongly again, compounding front-end woes.