The mortgage-sensitive five-year and ten-year sector underperformed as some of the front running of the convexity bid was unwound as Fannie indicated it closed the gap by purchasing new mortgages rather than Treasuries. And adding to the downside pressure was a story from a newswire Fedwatcher that the two FOMC dissents weren't representative of Fed thinking.
A strong rally on Wall Street also motivated profit taking, especially late in the session after news Iraq would permit U.N. weapons inspections. Those factors overwhelmed news of a decline in ISM to 49.5, a 0.4% drop in construction spending, and a plunge in unit vehicle sales.
Traders shrugged off the ISM data as the weakness wasn't a great as feared, and as the new orders component climbed back above 50. The curve initially steepened on back-end underperformance, but narrowed on the Iraq news and Wall Street's gain.