Treasuries returned from their holiday break lethargic and overstuffed, unable to digest another helping of robust U.S. data. The ISM index surged to 62.8 in November from 57.0, while construction spending gained 0.9% in October. The duo came in well above more modest expectations and suggested that the U.S. economic engine will continue to steam along into the fourth quarter.
Initial reaction by bonds was swiftly downwards, with both futures and cash losing over a point in the wake of the data. Supply and alleged front-running of a potential convexity liquidation also featured as a talking points for the declines as 10-year yields made a stab at 4.50% and the 5-year eyeballed 3.50%.
The Treasury will crank out $84 billion in bills this week and will likely announce a $31 billion total of 5-year notes and 10-year notes next week. This may partly explain the underperformance in the belly of the curve and elevation of volume in the area. There were also reports of a mortgage servicer liquidating a large short position of 105 puts on March 10-year notes -- effectively unwinding a bullish hedge. At midday stocks had a hiccup on news of a shooting at the U.N., but recovered into the close. The March bond closed down 15/32 at 107-12, but above lows of 106-16.