Treasury Curve Warps as Supply and Stocks Absorbed

Activity dominated by corporate and agency issuance pipeline

Monday proved to be a bit a sideways trade for Treasuries, with 1-5 year maturities outperforming both bills and long end of the curve.

Activity was dominated by the corporate and agency issuance pipeline, with Citibank pricing an upsized $5 billion 2-parter (5s & 10s) to today and Freddie Mac selling $6 billion in 5-year notes tomorrow. Hedging of callable agency debt and prepayment risk on mortgage paper continued to drive swap and agency spreads sharply narrower, with credit quality concerns in the market still a factor as well. This contrasted with the plight of sub-investment grade corporate paper and the cautiously optimistic tone from today's Fed speakers, McTeer and Guynn.

The March bond closed flat on the session at 105-19, but well above its lows of 105-08 as equities fell heavily over the course of the session. But a late 100-point rebound on the NASDAQ after the bond pit close sent the cash bond down 17/32 to 111.26.

Data was light, with home completions rebounded 1.9% from two soft months, while consumer credit proved surprisingly resilient. The $23 billion bill auction suffered from some altitude sickness.

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