Treasuries lost traction again after only a two-day reprieve from selling pressure, following another upside data surprise and a supply overload. The yield on the benchmark 10-year note rose to 10.40%.
The ISM Services index headlined and surged to 65.1 from 60.6, with most of its major components firm as well. Challenger reported layoffs jumped over 25K to 85.1K in July, but after payrolls' drop on Friday this lagging indicator was roundly ignored. Even though stocks fell as much as 2.5% at one stage, Treasuries couldn't make any upside progress. Led by the front-end, prices started to deteriorate in earnest as news of the $24 billion 3-year auction result spread.
The notes were awarded well above expectations at a messy 2.422%. Additionally, the 1.32 bid-to-cover ratio was the lowest in our records dating back to November 1984, though the Dutch auction made comparisons challenging.
On the options front, vol selling was thrown into reverse by the renewed slump on Treasuries, with buyers of put spreads on Sep 10s reported. Agency and swap spreads narrowed sharply up to 8 basis points, helped by a WSJ article that central bank selling was overstated.
The Sep bond closed 1-13/32 lower at 105-10, while the 2s-30s spread narrowed 6 basis points to +353 basis points in a swing back to bearish flattening. From MMS International