Treasuries End in Bull Steepener as Market Reprices Rate Hike Risk

Treasuries prices opened a touch lower/curves marginally mixed but ended in a bull steepener as the market repriced rate hike risk after it was viewed as too cheap following last week’s rally. From the onset, dealers were focused on 10Y filling a gap up to 100-24 and 2.165%. There was a little overshoot on that yield and most called for a correction back to 2.20% 10Y as a buy area.

The 10Y reopening auction got a nice concession but it tailed anyhow. On net though flattening at the long end of the curve was used as a means to set up for 30Y supply Wednesday. Meanwhile, Treasury Secretary Steven Mnuchin was on CNBC very early, saying they’s ideally like to get the corporate tax rate to 15%, but admitted he was not sure the president will be able to do that.

Mortgage spreads narrowed, as the bear steepener drew in real money demand amid fear the market will bounce once Treasury supply has concluded. There too was an up in coupon move. Swaps were tighter in the belly, wider in the wings.

Institutional flows were light as US IG corporate supply continued to dominate. Dealers said the front end push wider kept belly spreads behaved despite a flurry of swapped issuance with Yankee bonds and supra sovereigns on the tapes in 3-10Y.

Dealers confirmed large demand in E-mini S&Ps from a variety of accounts including real money in very early trade by a few pensions and a large asset manager but by midday that flow had dried up. A futures desk confirmed macro sellers in energy contracts broadly into the very early yet brief dip into negative territory, but that was not sustained.

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