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Bonds Are Still Bullish

It was a breakout session for the Treasuries, which enjoyed solid Asian demand in the front-end in the wake of the Fed's aggressive 50-basis point rate cut, some residual scarcity demand at the back-end and curve flatteners.

From the more than 96-basis point (38.2%) area, the 2s/30s curve flattened back down to 91 basis points; and a good 15,000 seller of FOBs (5s for bonds) via several houses left a footprint in the curve as well. Leveraged accounts, which had been fading the bond in the wake of the Fed's move, were also thought to have pared some of those short positions as stops cleared from 104-08 and again from 104-28 January 18 highs on the March bond.

By the time the dust settled, the bond made a two-standard-deviation move, with some good convexity buying noted on the March 10s as well. More corporate issuance continued to clog the pipeline, but the Treasury curve seemed to readily absorb it while the Fed is on the warpath. Data was mostly shrugged off, while stocks were sluggish, though the plunge in January NAPM to recessionary levels was noteworthy and bullish for bonds. Surprising resilience in auto sales knocked the bond of its 105-14 session high.

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