TREASURY WRAP: T-NOTE (H4) FUTURES SETTLE 16 TICKS HIGHER AT 111-09

Analysis details (20:30)

Treasuries rallied as more banking fears permeated in a data-light US session; decent 3yr auction ahead of 10yr and 30yr offerings. 2s -6.6bps at 4.406%, 3s -7.5bps at 4.190%, 5s -8.4bps at 4.038%, 7s -8.2bps at 4.070%, 10s -7.6bps at 4.089%, 20s -6.3bps at 4.392%, 30s -5.2bps at 4.293%.

INFLATION BREAKEVENS: 10yr BEI -1.1bps at 2.243%, 30yr BEI -1.2bps at 2.258%.

THE DAY: After Monday's sell-off, Treasuries recovered into the APAC Tuesday session, with Japanese December earnings and household spending figures on the soft side of expectations. The RBA, which held rates unchanged but left optionality for another hike, saw little kneejerk price action at the time, and T-Notes went on to print interim peaks of 111-03 at the London handover. 

But selling resumed as European trade got underway. There was a Reuters sources report doing the rounds at the time that the BoJ is on track for a policy shift by April, assisted by the wage outlook. While in data, German industrial orders came in hot, albeit the figures were skewed higher by some large aircraft orders. The latest ECB consumer inflation expectations survey saw declines in the 1yr-ahead reading but the 3yr-ahead rose. T-Notes printed session lows of 110-23+ at the NY handover, holding above Monday's YTD low of 110-22+ with the curve already modestly steeper ahead of US supply.

There was no tier 1 data in the US to digest and the IG debt supply pipeline thinned vs Monday, leaving fears over another plunge in NYCB shares and the regional banking sector to permeate. That saw Treasuries grind higher through the US session, albeit the long end lagged, with T-Notes peaking at 111-12+ ahead of the 3yr auction - which was solid (details below) - and hovering near highs into settlement.  

3YR AUCTION: An overall decent 3yr auction from the Treasury that sees a ramped size USD 54bln of notes sold at 4.169%, a bit cheaper than last month's 4.105%, marking a 0.8bp stop-through the When Issued yield; not as strong as January's 1.1bp stop-through but better than the six-auction average tail of 0.5bps. The bid/cover ratio of 2.58x was beneath the prior 2.67x and average 2.66x. Dealers were left with just 15.7%, beneath the prior 17.9% and avg. 18.8%, on account of increased participation vs January from both Directs and Indirects.

THIS WEEK'S AUCTIONS: US to sell USD 42bln of new issue 10yr notes on Wednesday and USD 25bln of new issue 30yr bonds on Thursday; all to settle on Feb 15th. In Europe, the UK is selling 4yr notes on Wednesday and Germany is selling 7yr notes on Wednesday. In Japan, a 30yr bond on Wednesday and a 5yr note on Friday.

FED PRICING: The implied probability for a March cut has risen back to 20% from 15% on Monday, and the implied probability for a cut by the May meeting has risen to 85% from 75%. Meanwhile, the amount of cuts priced across 2024 has risen to 122bps from 115bps on Monday.

STIRS:

• SR3H4 +2bps at 94.79, M4 +5.5bps at 95.175, U4 +7bps at 95.575, Z4 +8bps at 95.925, H5 +8.5bps at 96.22, M5 +9bps at 96.435, U5 +9bps at 96.56, Z5 +9bps at 96.615, H6 +9bps at 96.62, H7 +10bps at 96.555, H8 +10bps at 96.455.


• SOFR fell to 5.31% as of Feb 5th from 5.32%, volumes fell to USD 1.731tln from 1.849tln.


• NY Fed RRP op demand at USD 0.532tln (prev. 0.552tln) across 71 counterparties (prev. 80).


• EFFR flat at 5.33% as of Feb 5th, volumes rise to USD 96bln from 91bln.


• US sold USD 80bln of 42-day CMBs at 5.280%, covered 2.87x.


• US leaves 4-, 8-, and 17-week bill auction sizes unchanged at USD 95bln, 90bln, and 60bln, respectively; 17-week bills on Feb 7th and 4- and 8-week to be sold on Feb 8th; all to settle on Feb 13th.

06 Feb 2024 - 20:30- Fixed IncomeResearch Sheet- Source: Newsquawk