Bonds and notes waffled on both sides of unchanged in Tuesday's session as the bears focus on supply and the bulls argue a flight to quality. In the end, the day's trade was a relative wash.

Light volume likely played a big part in the day's price swings. After being under pressure in early trade, Treasuries rallied back in anticipation of a 3-year note auction, but then pared gains on post-auction trade. Demand for the government issued notes was strong, but the yield of 1.519% paid to buyers was at a higher than expected. There was a 54% indirect bidder participation, which suggests that foreign investors continue to like the safe haven of Treasuries.

In the absence of economic news, equities have once again become the primary force behind price moves in the bond pit. Equities have struggled in recent weeks and are approaching significant support areas and it could be make or break time. For instance, the S&P must hold the mid to low 870's to avoid a sweeping move to the 850, and possibly even 840 area. Should the mid-870's be seen in the S&P bonds and notes should get a lift. The dollar on the other hand, offers little directional help. The September index has been range bound for weeks, with little indication of the next move.

Treasuries are simply too quiet; we don't expect this to last long. It seems as though the long bond is preparing for another large rally. If you have bearish positions in this market I recommend playing it close to the chest. I see potential for the September 30-year bond to see prices just under 121. This rally likely won't happen should equities hold their ground, but my analysis suggests that it is a real possibility. That said, if it does happen it should be a great time to sell calls and/or buy puts. Aggressive traders may even want to execute a bear put spread with a naked leg.