After opening in the green following a thinly traded overseas session absent trading in the U.K., Treasuries sank like a stone amid more mighty housing data and lingering agency anxiety in the credit markets. Corrective curve steepening against the grain of last week's flattener also dictated the tone, despite the announcement of $25 billion in 2-year notes to be auctioned Wednesday.
News of a 5% gain in U.S. existing home sales to a record 6.12 million pace in July set the ball in motion to the downside. In a thin month-end and pre-holiday market, declines were compounded by fear gripping the credit markets after ratings agency Fitch downgraded housing agency Freddie Mac's subordinated debt and preferred stock ratings (though S&P and Moody's upheld their ratings).
Agency and swap spreads widened back out and Treasury yields backed sharply higher as well. From the 4.40% area 10-year cash yields topped 4.55% before stalling amid talk of mortgage-related duration hedging, though dealers pegged the next significant yield tripwire around 4.65-70% Aug. 14 highs.
Volume was bid up as well, as a hedge against more market mood swings this week. The September bond closed down 28/32 at 106-08, well above 105-16 session lows, while the 2-year note and 30-year bond spread steepened 2 basis points to +335 basis points.