Bonds Remain Defensive Amid More Supply and Less Fed Sponsorship

June is the month where markets finally have been able to experience the sharp drop in Fed bond buying associated with balance sheet normalization.  MBS purchases have slowed from nearly $40bln last month to just over $10bln in the current month.  The Treasury side of the balance sheet has already been shrinking in June as there haven't been enough proceeds exceeding reinvestment caps to generate any positive flow.  This is likely compounding the inflation fear that continues to serve as a backdrop for recent rate spikes.  Both of those factors reared their ugly heads at yesterday's 5yr Treasury auction.  While it's not on the same level as the 5yr, today's 7yr auction provides another important test of the market's ability to do the heavy listing without the Fed standing by as a spotter.