US Treasuries Prices End Well off Morning Highs

US Treasury prices opened NY in a flight to quality and bull flattening but ended well off early morning highs and tights. The early rally was in response to North Korea’s missile launch over Japan very late Monday afternoon. Additionally, early trade had the USD weaker while the EUR and JPY surged as risk was unwound while credit spreads widened, and global stocks fell sharply.

With Treasuries hitting 2.08% overnight, the fear was there was hardly any resistance in 10Y till 2.02%. But, cooler heads seemed to prevail, hoping that the POTUS would focus on the Gulf Coast and damage left behind by Hurricane Harvey. With that thought in mind, dealer sentiment was overwhelmingly centered on selling the Treasury rally. The only question was, who would go first. While some sell orders were placed at higher levels, those that went before selling the rally executed on steepeners.

As real money sold E-mini S&Ps in early trade, block buys were reported in September 10Y. Also in early trade, commercial demand was reported in RBOB spreads while macro money bought gold. Shortly after 10am ET, Treasuries started to ebb and risk markets improved. Into the decline in Treasuries, mortgage accounts sold December 5Y and 10Y while conditional downside was bought and as rollover from September to December remained thematic.

In cash, dealers continued to report mild two-way flow in the belly of the cash curve. In US Swaps, fast money received in the long end while gamma hedging flows were two-way in the long end. In TIPS duration shedding was reported though real money bought BEs. Late morning, stocks surged on large demand as rumors swirled that a massive hurricane relief bill may be attached to the debt ceiling increase or that it may be attached to an overall budget package, avoiding a shutdown threat. As such, Treasuries backed off amid chatter of a large seller of long bonds, a few block sales of September 10Y, and a concession ahead of the $28 billion 7Y sale. By day’ss end, the Russell and E-mini S&P were green.

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By Matthew Robinson