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Focus on supply was the main story on Monday and the session was cleft into two parts by the Treasury's $27 billion two-year note auction. Plenty of other risk factors swirled like blizzard through the pre-holiday market wasteland, but kinks in the coupon curve were inflicted mostly by supply. Despite the weaker pre-market trade on stocks geopolitical strains, prices at the front-end of the curve were the first to go under as dealers sought to cheapen up the WI two-year notes prior to the auction.
The two-year note and 30-year bond spread initially narrowed four basis points to +312, but closed at +315 basis points after the back-end of the curve was dragged down as well, though losses were cut by the end of the session as stocks failed and the March bond closed just 4/32 lower at 110-26.
Income/PCE data (+0.3%, +0.5%) came in above expectations, though the latter continues to outstrip the former. U. Michigan household sentiment was revised slightly lower to 86.7.
Iraq offered some vague verbal concessions on inspections, but the U.S. conducted its largest military exercise in Kuwait since the Gulf War. A Congressman also requested release of U.S. oil reserves after oil topped $32 a barrel and two-year highs, admitting two Gulf refineries could soon go dry.