After extending Tuesday's rally slightly in overnight trading, bonds were hit hard by agency hedge selling and losses were exacerbated by short term overbought conditions. The 5-year sector paced the declines, but was closely followed by the 2-year and 10-year notes. The 5-year note closed at 3.33%, up about 8 basis points from 3.235 basis points on Tuesday.
There was minimal data and no significant events on the session to pressure the market, though the MBA's report of a 14.9% decline in refis may have motivated some of the early selling. However, pressure seemed to come mostly from positioning and unwinding of Tuesday's option-expirery related demand, as well as technicals.
Failure at key resistance at the 107-28 on the September bond galvanized bears and the drop in prices from there was swift. Comments from Fed President Broaddus that he could see growth accelerating to a 4% area in 2004, but that he had no real time frame for how long the Fed would remain accommodative didn't impact significantly, though it maintained a curve flattening bias.