US Treasury Market: Bonds Rally Sharply, Long End Leads as Risk-Off Buying Persists Through US Session

Treasuries maintained a sharply bullish flattening trend during the US trading session, with earlier safe-haven bids largely carrying through even as US equities edged higher.

During the US morning, large block trades in the futures market underpinned the bond rally, while continued CTA short-covering flows likely provided support to futures. Gains briefly stalled after September PPI and retail sales data came in above expectations.

Just past 3pm New York time, Treasury yields from the belly to the long end of the curve were no more than 10 basis points lower, with 2s10s and 5s30s spreads narrowing by 4.5 basis points and 1 basis point respectively versus Wednesday's close. The 10-year Treasury yield stood around 5.08%, slightly above its intraday low.

After the PPI and retail sales data released in the US morning came in above expectations, US Treasury futures gave back gains accumulated during Asian hours and early London trading. However, a large block purchase in ultra-long Treasury futures pushed the 30-year yield back to its intraday low, and the bond market subsequently resumed its advance, led by the long end.

Subsequently, a flattening trade emerged in the futures market — selling 5-year Treasury futures and buying ultra-long Treasury futures — further reinforcing the bullish flattening trend in the yield curve. Futures trading was active, providing support to Treasury prices. Just past 3pm New York time, 10-year Treasury futures volume was about 60% above the 20-day average.

A similar surge in volume occurred on Wednesday and was seen as a sign that CTAs had begun covering shorts. As of 3:41pm New York time, the 2-year Treasury yield fell 4.4 basis points to 4.753%. The 5-year Treasury yield dropped 8.8 basis points to 4.8989%. The 10-year Treasury yield declined 9.6 basis points to 5.0892%. The 30-year Treasury yield fell 9.6 basis points to 5.4275%. The spread between 5-year and 30-year Treasury yields narrowed by about 0.8 basis points to 52.68 basis points. The spread between 2-year and 10-year Treasury yields narrowed by about 4.8 basis points to 33.41 basis points.