The bond market was mired in a typically lackluster, pre-auction trade on Tuesday and prices closed modestly lower as the Treasury kicked off its $32 billion Q1 refunding operation.
The $11 billion, reopened five-year auction was the main focus of the session, and the morning was spent setting up for the auction. Treasuries actually opened the day on a slightly firmer note, with the bond extending Monday's gains slightly. But, a report from the Bond Market Associations's (BMA) Primary Dealer Committee, which recommended continued issuance of the 30-year bond for "as long as practical," knocked the bond lower and provided a good excuse for traders to build a concession into the five-year sale.
Remember, it was the BMA's Advisory Committee's informal suggestion for termination of the bond that has led to recent long-end outperformance. The bond eventually corrected from its lows after the Challenger layoff report posted record planned job cuts. But the weight of supply left the entire curve sluggish into and following the auction. The five-year note auction met its rather mediocre expectations and thus had little impact.