It was calm before the storm ahead of the 10-year auction Wednesday, but it was a perfect storm for Treasuries afterwards when compounded by a morose Beige Book survey.
Lulled into complacency by miserable volumes, traders were jarred by the surprisingly strong reception to the $11 billion in new paper, with a one-two punch from the stale economy regionally. After flat-lining in the low-105's, September 10-year bonds surged ahead of the auction announcement, as word leaked out it would be a good one and a black box fund was rumored scooping up five-year and ten-year bills and bonds. WI yield was a low 5.078% and the 2.85 bid/cover ratio an eight year high.
A West coast bond fund was later rumored caught short of the issue, or more specifically about 50,000 106 calls on Sep 10-year bonds written against its underlying portfolio, which breezed into the money as the contract flew into the low 106s.
The Beige book splashed more fuel on the bondfire and dowsed stocks, noting slow growth or lateral movement in the economy. Indeed, weakness spread from the manufacturing sector to services, retail and commercial real estate. The only bright spots were housing and energy prices.