The bond squandered a near 2-point lead on Friday made possible by a slight shortfall in headline U.S. data relative to expectations and a squeeze on short positions. Retail sales grew by 0.6% in August down from 1.3% in July, core PPI slipped to 0.1% from 0.2%, and University of Michigan sentiment eased to 88.2 from 89.3.
After reports of hedge fund selling of 5-year futures overnight and Asian central banks buying 2-year notes, prices took off like a scalded cat after the sub-par headline retail sales result. After the surge, outright flows dried up and undermined momentum. Without the same volume to support prices, they fell back half way in the afternoon as the chips came off the table.
One large bank reportedly increased its sizable call position on March bonds to 55,000, presumably on behalf of a mortgage institution hedging against risk of lower rates this week and a leg up in refis. Otherwise, talk swung around to agency Fannie Mae's duration gap, which will be reported on Monday, though agency and swap spreads continued to hold at tighter levels.
The December bond closed 22/32 higher, though well off session highs of 108-26. The 2-year note and 30-year bond spread finished 3 basis points firmer at +355 basis points. Washington Post's John Berry said the Fed's weak bias would remain intact Tuesday.