Prices Close Lower, Curves Mostly Steeper

US Treasuries prices closed lower with mostly curves steeper after fading an early safe haven rally. In early trade Treasuries were boosted by underperforming Bunds as Spanish/Catalan risk amid lower Spanish equities and widening in Spanish bonds vs Germany. This caused a repeat of Monday’s price action in Treasuries as shorts set up for supply only to be squeezed.

There was, however, some prop buying in 10Y while in the conditional markets buyers of downside via Nov 10Y 124 and Nov 10Y 125.5 puts were evident for size. The market was a bit shaken up at 10:30 am when Secretary of State Rex Tillerson announced an impromptu speech. In the run up to the event, rumors swirled that Tillerson had resigned, thus some block demand surfaced in Dec 10Y. To the contrary, Tillerson told the media he wanted to clear up his position in the administration and that he had never considered leaving his post.

In the aftermath, Treasuries eased back a bit. Flows were light but two-way with cash desks reporting real money demand in 5Y while fast money bought 5Y on the 3/5/10Y fly and real money 5/30Y flatteners. Real money was also on the sell side in both 3Y and 7Y. In Treasury futures, flows were also two-way mostly in the longer end, specifically with banks playing in Dec 10Y and hedge funds in Dec 30Y earlier in the day.

Banks too were buyers of bunds on that earlier strength and at the same time real money reset hedges at better levels, selling both Dec Ultra bonds and Dec 10Y on the earlier Spain bid. Swaps saw mortgage, insurer and bank payers in 2Y, 5Y and 10Y while cross ccy deals pressured both 10Y and 30Y spreads while fast money took profits on 5/30Y steepeners

In energy, commodity indexer demand was seen in crude, Brent, RBOB, and heating oil after the DOE data but that flow fizzled out quickly. Dealers reminded that the BCOM and GSCI roll starts on Friday. There were all time highs again in E-mini S&Ps adding after being up for five days in a row as well as posting four new contract highs in a row.

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