Treasuries Bounce Back

The stock market's tumble drove Treasuries higher, with risk aversion the prevailing theme to start the holiday-shortened week

Wrecked stocks Monday provided the guiding beacon for Treasuries, with risk aversion the prevailing theme to start the holiday-shortened week. Treasuries pared their early deficit, grinding up from early session lows as stocks lost traction, while the curve maintained its steeper profile. The data mix provided little lasting influence, with ISM survey fractionally higher at 56.2 and construction spending sporting a deeper than expected drop of 0.7%.

Outright flows were anemic, though mortgage-related and structured option trading was reasonably active. The belly of the curve was initially heavy after sales of five-year notes by a German bank, with wings outperforming in line with some butterfly option strategies deployed.

A Midwest bank continued to sell September calls on 10-year notes against calls on the December contract, likely for its mortgage client.

The September bond bounced from 102-08 congestive support and closed up 5/32 near session highs of 102-31. The two-year note and 30-year bond spread narrowed five basis points to +265 basis points, but this was mostly a function of the roll down to the new two-year note auctioned on Friday and effectively the curve actually finished steeper on the day after the new two-year note outperformed.

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