Treasuries End Lower

Treasuries collapsed the day after the Fed held rates pat and signaled that policy would remain accommodative for some time to come. The 1.4% surge in July retail sales underlined the tenuous position the Fed's pre-commitment strategy, while export prices slipped 0.1% and business inventories gained only 0.1%. Leveraged accounts were only too happy to front-run the back up in yields, with the 10-year flogged back above 4.45% to 4.55%, triggering duration-related selling by the mortgage community.

This pressure point was in turn highlighted by the 16.1% dive in the MBA mortgage index, in combination with news that Fannie Mae's portfolio duration widened to +6 months in July from -1 month in June -- suggesting they would have some more duration shedding to do to bring their ratios back in line. "Black box" funds were also rumored to be selling, while curve steepening was also given a boost by unwinding of pre-FOMC flatteners by one shop, but fit with the Fed's reflationary stand as well.

10-year yields shot 15 basis points higher to 4.58%, while the September bond closed 2-17/32 lower at 104-18. The 2-year note and 30-year bond spread steepened 2 basis points to +365 basis points, though losses spread to the front-end as well. Stocks and the dollar frayed on rising rates.

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