U.S. Treasuries extended their early sell-off during the morning trading session following the release of January's ISM manufacturing data, which came in stronger than anticipated. Yields were already edging higher before the data release, influenced by news of Oracle's mega bond deal and significant block selling in 2-year and 10-year Treasury futures. In SOFR options, larger flows appeared to lean more towards upside protection, contrasting with the weakness seen in the short end of the curve that day. Just after 3 p.m. New York time, Treasury yields were near their daily highs, with increases ranging from 3 to 4 basis points across the curve, resulting in a bear-flattening pattern. The 10-year Treasury yield hovered around 4.27%, up 3 basis points on the day, while the 2s10s spread narrowed by nearly 1 basis point. Most of the decline occurred during the U.S. morning session after the January ISM Manufacturing Index printed at 52.6, surpassing the forecast of 48.5, with the new orders component also significantly exceeding expectations. Following the data, short-end and belly bonds led the losses, causing the curve to flatten; implied Fed rate cut probabilities from swaps edged slightly lower, with the market now pricing in approximately 48 basis points of cumulative easing for the year, down from 52 basis points at Friday's close. Even before the data was released, Treasuries had given up their earlier gains following the announcement of Oracle's massive bond offering, while block selling in 2-year and 10-year Treasury futures also exerted some upward pressure on yields. Shortly before the close, Oracle's transaction to issue a total of $25 billion in bonds across eight tranches had commenced. In SOFR options, the day's flow was skewed towards dovish protection, with notable activity including a substantial direct purchase of June 2026 97.00-strike call options, a bet that market pricing will reflect two to three rate cuts in the first half of this year. As of 3:07 p.m. New York time: The 2-year Treasury yield was 3.5634%, The 5-year Treasury yield was 3.828%, The 10-year Treasury yield was 4.2674%, The 30-year Treasury yield was 4.9024%, The 5-year/30-year Treasury yield spread was 107.27 basis points, The 2-year/10-year Treasury yield spread was 70.4 basis points.
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