Bulls Go on the Offensive

The 10-year Treasury note sold off a modest 7/32 to yield 4.53% in reaction, but bond investors were more fixated on the growth story, which took a blow from a weak factory orders report. Factory orders declined 5.6% in January, after a 2.6% increase in December. Analysts had expected orders to fall 4%.

"When bond traders see evidence [of] economic moderation happening, they want to turn that into a recession bet," says T.J. Marta, senior fixed-income strategist at RBC Capital Markets. Marta notes that this has been traders' mindset throughout this rally -- to embrace negative news about economic growth and price in future rate cuts.

But Tony Crescenzi, chief fixed-income analyst at Miller Tabak and RealMoney.com contributor, says the weakness is "old news" because durable goods orders are 55% of factory orders, and the market already knew that was exceptionally weak.

Elsewhere, pending home sales dropped 4.1% in January, more than the 1.2% decline analysts had expected.

But it seems investors still are paying more attention to words and psychology these days vs. fundamental data. Soothing words from U.S. Treasury Secretary Hank Paulson in Tokyo helped spark a rebound in the mortgage-lending sector. "Credit issues are there, but they are contained," Paulson told reporters, according to newswire reports. He said the U.S. financial industry will not experience "a big impact" from the subprime mortgage meltdown.