TREASURY WRAP: T-NOTE (H4) FUTURES SETTLE 13+ TICKS LOWER AT 111-13+

Analysis details (20:30)

Treasuries bear-flattened after hawkish ECB speak and hot UK CPI was followed by hot US retail sales. 2s +11.8bps at 4.346%, 3s +10.4bps at 4.123%, 5s +7.2bps at 4.017%, 7s +5.7bps at 4.066%, 10s +3.2bps at 4.098%, 20s +0.9bps at 4.431%, 30s +0.3bps at 4.308%. 

INFLATION BREAKEVENS: 5yr BEI +1.1bps at 2.266%, 10yr BEI +0.4bps at 2.306%, 30yr BEI -0.4bps at 2.304%.

THE DAY: Treasuries saw a recovery attempt into the APAC morning on Wednesday after the Waller sell-off on Tuesday. T-Notes peaked for the session at 112-01+ on the heels of the Chinese activity data, which was mixed, with December retail sales coming in on the soft side but industrial output rising above expectations. Contracts began paring lower into the Tokyo afternoon. 

The sell-off gained momentum in the London morning, led by the front end while the long end was supported, amid the rise in UK December CPI figures but also more hawkish ECB Speak with Lagarde pushing back cut expectations to the "summer", while hawk Knot went as far as saying that the more easing the markets do for the ECB, the less likely the ECB will actually cut. T-Notes hit support at 111-22+, which was the post-Waller low on Tuesday. The proceeding German 30yr auction taps were received ok, although the UK 10yr saw more noted demand. Citi's rates desk noted steepener interest - a key theme of the new year - emerged at the curve's flattening extremes.

T-Notes stretched out a fresh low of 111-18+ just ahead of the US retail sales data and dived even lower after the strong report. Contracts ultimately bottomed at 111-09 later in the NY morning with above forecast industrial production and NAHB housing index weighing. However, the curve flattening extended into the NY afternoon, with duration recovering ahead of the 20yr auction (the poor results capped the recovery) while 2yr futs stretched out new lows ahead of settlement; 2s10s and 2s30s cash spreads both saw their largest one-day flattening since early November.

20YR AUCTION: A poor 20yr auction from the Treasury with the USD 13bln reopening sold at 4.423%, a c. 20bps of cheapening from December's offering but still a 0.8bp tail of the When Issued yield, worse than the six-auction average 0.3bp stop-through but better than December's 1.5bp tail. The auction was covered 2.53x, a bit beneath both the prior 2.55x and avg. 2.58x. Dealers were left with a chunky 17.3%, indicative of poor demand, worse than the prior 12.9% and avg. 10.6%, mainly on account of Indirects taking a dip M/M to 62.2% from 66.4%. This is the last 20yr auction before the February refunding, where some analysts have suggested the Treasury could ramp the size of 20yr auctions given their strong auction performance, although the last two tails may temper the appetite for that.

FED PRICING: March implied cut probability down to 56% from 68% seen after Waller on Tuesday, and down from 86% seen on Friday after the misses on PPI. There are now 139bps of cuts prices across 2024 vs 157bps priced after Waller on Tuesday and 170bps after PPI on Friday.

THIS WEEK'S AUCTIONS: US to sell USD 18bln of 10yr TIPS on Thursday; to settle on Jan 31st. Elsewhere on Thursday, Spain and France are issuing across multiple tenors, and Japan is selling a 20yr.

STIRS:

• SR3H4 -5.5bps at 94.89, M4 -13bps at 95.33, U4 -17bps at 95.74, Z4 -18bps at 96.09, H5 -17.5bps at 96.37, M5 -16.5bps at 96.555, U5 -14.5bps at 96.65, Z5 -12.5bps at 96.675, H6 -11bps at 96.65, H7 -6bps at 96.545, H8 -3bps at 96.415.


• SOFR rises to 5.32% as of Jan 16th from 5.31%, volumes rise to USD 1.854tln from 1.590tln.


• NY Fed RRP op demand at USD 0.590tln (prev. 0.583tln) across 77 counterparties (prev. 65).


• EFFR flat at 5.33% as of Jan 16th, volumes fall to USD 85bln from 93bln.


• US sold USD 58bln in 17-week bills at 5.185%, covered 3.22x.

17 Jan 2024 - 20:30- Fixed IncomeData- Source: Newsquawk