Indeed, heavy open interest (83,000) in 114 calls on Dec 10-year notes set to expire today provided a ceiling on the session, as the sellers of the options sought to keep them from expiring in-the-money. The net effect was that the contract drifted below that strike for much of the session before finally giving way and sinking lower. Any rise in price above that strike would have forced matched hedging in the underlying future to cover the payout to their owners who were mostly mortgage institutions.
In the end, the December bond closed up 6/32 at 111-03, while the 2-year note and 30-year bond spread flattened 1 basis point to +320 basis points. Agency spreads narrowed after Freddie Mac's huge earnings restatement revealed no surprises.
The dollar remained nervous after al-Qaeda boasted it would carry out a large operation into next year. Liquidity after next week will come at a premium after several dealers close their trading books for the year.