Treasuries erased an early deficit Tuesday, as accelerating stock losses into the close helped offset temptation to make room for $29 billion in government supply over the coming two sessions. Data played only a bit part, with the mixed weekly retail sales data ahead of the big August report on Friday. Wholesale trade data was also a footnote, though the inventory/sales ratio dropped back down to record lows of 1.21, which elevated hopes of inventory rebuilding in the coming quarters.
Flows were somewhat tepid ahead of supply and the anniversary of September 11 on Thursday, though bullish early option bets foreshadowed the afternoon rebound. A large Midwest bank was reputed to have purchased 10,000 116 calls on March bonds over the last couple of days. Prices lagged at the long-end, however, as curve steepening bets remained favor given the deteriorating fiscal outlook and reflationary Fed policy, despite the lump of supply in the belly.
Agency Freddie Mac launched a $4 billion 5-year global note offer as well ahead of Treasury Snow's Congressional testimony tomorrow. The December bond closed up 6/32 at 106-19, while the 2-year note and 30-year bond spread widened 4 basis points to +354 basis points. The dollar broke to two-week lows vs. the euro on fiscal fears and stock weakness, but gold surged to $383.