Treasuries fell sharply Wednesday, though off the day's lows, to nearly erase Tuesday's gains. Volume remained light, however, in typical late August fashion.
After extending Tuesday's rally slightly in overnight trading, bonds were hit hard by agency hedge selling and losses were exacerbated by short term overbought conditions. The 5-year sector paced the declines, but was closely followed by the 2-year and 10-year notes. The 5-year note closed at 3.33%, up about 8 basis points from 3.235 basis points on Tuesday.
There was minimal data and no significant events on the session to pressure the market, though the MBA's report of a 14.9% decline in refis may have motivated some of the early selling. However, pressure seemed to come mostly from positioning and unwinding of Tuesday's option-expirery related demand, as well as technicals.
Failure at key resistance at the 107-28 on the September bond galvanized bears and the drop in prices from there was swift. Comments from Fed President Broaddus that he could see growth accelerating to a 4% area in 2004, but that he had no real time frame for how long the Fed would remain accommodative didn't impact significantly, though it maintained a curve flattening bias.