The early focus was on U.N. weapons inspector Blix's report to the Security Council on Iraqi compliance to Resolution 1441. Concerns he might reveal a "smoking gun" weighed heavily on global stocks and gave bonds a big lift, extending Friday's gains. However, the re-emergence of the rumor of an exile package for Saddam Hussein, and an as-expected report from Blix encouraged profit taking and bonds quickly tumbled. Concurrently there was talk of asset allocation trades out of bonds and into stocks.
But while the gains on Wall Street were fleeting as Secretary Powell declared Iraq in "material breach," Treasuries weren't able to recover. Overbought conditions left the market heavy, as did talk President Bush would not throw down the gauntlet at Tuesday's State of the Union. An unexpected 5.2% surge in existing home sales didn't really impact, nor did the Treasury's announcement of a $27 billion 2-year note auction on Wednesday.