Supply Buries Treasuries, Curve Flattens Further

Bonds were helped by talk of an Asian central bank buying in the front end of the yield curve

Treasuries were buried under a ton of supply Tuesday and only the bond managed to surface for air. Profit-taking, curve trades, and supply again dominated action. Shorter dated issues were hit the hardest on unwinding of curve steepeners as some of last week's rate euphoria was tempered. And the concentration of supply in the belly of the curve added to the pressures.

The market opened soggy after an overnight recovery in stocks and ahead of a heavy supply schedule ($10 billion in agencies alone). A hedge fund was reportedly getting out of a large long position in 5s and 10s and buying the bond early on. Pricing of Freddie Mac's $6 billion five-year brought a little relief to that area of the curve as rate locks were unwound. And talk of an Asian central bank buying in the front end helped a little too.

But the mountain of supply proved too much and the market remained heavy. In options, there was a size buyer (20K) of Apr 112 bond calls early on. Though stocks didn't impact much during the session, a late drop in the Dow gave some support to bonds and the 30-yr was able to close in the plus column.

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