Although the drop in home sales lit up Treasuries, an earlier report on durable goods got traders in the mood to buy. Orders for durable goods, big-ticket items meant to last more than three years, doubled expectations in February, rising 2.6 percent. This was a huge improvement over the downwardly revised 8.9-percent decline in January.

In both cases, however, orders for civilian aircraft drove the numbers. In February, aircraft orders soared, pushing orders for durables upward, whereas orders for aircraft were almost nonexistent in January. Excluding transportation, durables fell 1.3 percent, and orders for nondefense capital goods also were off by a sharper-than-expected 2.3 percent. This was a negative for the economy, as it can indicate weaker future business spending. The possible economic downturn was the focus for bond traders, who viewed that glass as half-empty.

New home sales took a dive in February, falling 10.5 percent to an annual rate of 1.08 million units -- the lowest level since May 2003. This was a far bigger loss than the 2.4 percent decline that analysts were predicting. In addition, January numbers were downwardly revised to 1.207 million units from 1.233 million. The inventory of unsold homes hit a record high of 548,000, which represents a six-month supply. And the median sales price fell 2.9 percent to $230,400. These numbers were 180 degrees from existing home sales in February, which climbed 5.2 percent.

Equity markets ride a bumpy road

Stocks rose in early trading, as many believed the devastating report on new home sales might halt the Fed's credit-tightening program. In addition, Wall Street welcomed the lower interest rates stemming from the bond rally. And there was some positive news that kept the markets upbeat. But another rise in oil prices and uncertainty over what will come out of Tuesday's Fed meeting turned the markets around.

Shares of Google rose 7 percent on news that the search engine giant will be added to the Standard & Poor's 500 next Friday. Lucent Technologies also grabbed headlines because it is in talks with French telecom gear maker Alcatel SA. A merger of these two companies would result in a corporation with a market cap of about $34 billion. Palm also made noise, rising 2 percent after beating quarterly estimates thanks to demand for its Treo, a popular PDA.

On the negative side, Cephalon fell 13 percent when an FDA panel recommended against approval of its new drug for hyperactivity and attention deficit disorder in teens and children. Another rise in oil prices also weighed on the markets as concerns about oil supplies for the summer driving season persist. These worries are exacerbated by continuing attacks on Nigerian oil fields and refineries and uncertainty about future relations with Iran and Iraq.

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