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Treasuries Reverse Course to Finish Higher

Treasuries rebounded Tuesday but the gains were corrective. The onslaught of stronger-than-expected data and increased supply has weighed heavily on Treasuries and should keep the tone bearish into Friday's payroll report. Tuesday's numbers were no exception to the trend and put Treasuries on the defensive early. Challenger announced planned layoffs fell 42% in November after surging in October. Auto sales remained healthy thanks to a surge in GM.

Shorter-dated instruments underperformed initially, but the advent of more corporate issuance, on top of an already heavy Treasury calendar, put increased pressure on the belly. Note that Treasury supply totals $84 billion this week and potentially another $83 billion next week, including 5-year notes and 10-year notes. However, as the 5-year note topped out just shy of 3.50% and the 10-year note near 4.45%, selling eventually petered out, giving the market a chance to recover.

Unwinding of some of the curve flattening plays also aided the turnaround. The short end paced the gains and the 2-year note and 30-year bond spread edged back out a few basis points to +308 basis points. The Treasury's cash management bill sale saw strong demand with over $97 billion in bids for the $32 billion in 12-day paper.

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