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.