TREASURY WRAP: T-NOTE (H4) FUTURES SETTLE 24 TICKS LOWER AT 111-27

Analysis details (20:55)

Treasuries bear-steepened after Fed's Waller tapered expectations for a deep cutting cycle. 2s +8.8bps at 4.226%, 3s +9.5bps at 4.017%, 5s +10.9bps at 3.941%, 7s +11.2bps at 4.007%, 10s +11.6bps at 4.066%, 20s +11.3bps at 4.421%, 30s +10.8bps at 4.306%.

INFLATION BREAKEVENS: 5yr BEI +1.6bps at 2.255%, 10yr BEI +2.9bps at 2.304%, 30yr BEI +3.1bps at 2.307%.

THE DAY: Treasuries had been trundling lower alongside other govvies since last Friday's settlement with the front end leading entering stateside trade on Tuesday. The weekend saw familiar hawkish rhetoric from Fed's Bostic (voter) in the FT, who continues to warn about cutting too early (before Q3), while Goolsbee gave a more feeble pushback against market pricing late on Friday in a Fox News interview, saying that "[markets] were getting the cart before the horse". The bearish impetus had mainly stemmed out of EGBs, however, with Chief Economist Lane, an influential dove, pushing back on rate cuts in H1 over the weekend, followed up by a string of other ECB speakers on Monday pushing back on imminent rate cuts. Japan also saw lackluster demand at its 5yr JGB auction on Tuesday, exacerbating the downside. Also note a Bloomberg article on Monday, "Japan Wage Gains of 4% to Pave Way for BOJ Hike: Ex-Official".

T-Notes found interim lows of 112-01+ in the NY morning on Tuesday, although most of the selling up to that point had occurred on Monday, with losses suppressed out of London on Tuesday by firming Gilts after the soft UK wage data, not to mention solid demand seen at the German Bobl and UK inflation linker auctions. However, T-Notes spiked to resistance at 112-11 after the tumble to the lowest reading in the Empire State mfg. survey since COVID. Contracts struggled to sustain the bid at first amid more corporate issuance and hedging ahead of Fed's Waller, but a new interim high of 112-11+ was stretched out late in the NY morning ahead of the Fed Governor's remarks.

The release of Waller's speech, where he said rate cuts could occur "in 2024" - a noted lack of explicitness on timing - whilst also saying the strong economic backdrop means rate cuts should be done "methodically and carefully", with "no reason" to cut as quickly as in the past, saw T-Notes fall from 112-08 to 111-28+ within a few minutes, stretching to session lows of 111-22+ a few hours later. The curve bear steepened as the dust settled from Waller, with attention on Wednesday's sovereign supply (details below). 

FED PRICING: March implied cut probability down to 68% from 86% seen on Friday after the misses on PPI with 157bps of cuts priced across 2024 vs 169bps on Friday. Note, before Waller spoke at 16:00ET, a March cut was at 76% implied and 165bps of cuts were priced across 2024.

THIS WEEK'S AUCTIONS: US to sell USD 13bln of 20yr bonds (reopening) on Wednesday and USD 18bln of 10yr TIPS on Thursday; both to settle on Jan 31st. Across the pond, we get a German 30yr auction and a UK 10yr auction both on Wednesday. On Thursday, Spain and France are issuing across multiple tenors, and Japan is selling a 20yr.

STIRS:

• SR3H4 -7bps at 94.94, M4 -13bps at 95.445, U4 -13bps at 95.895, Z4 -12bps at 96.255, H5 -11bps at 96.535, M5 -10.5bps at 96.71, U5 -10bps at 96.785, Z5 -10bps at 96.79, H6 -10bps at 96.755, H7 -12.5bps at 96.60, H8 -13bps at 96.44.


• SOFR flat at 5.31% as of Jan 12th, volumes fall to USD 1.590tln from USD 1.648tln.


• NY Fed RRP op demand at USD 0.583tln (prev. 0.603tln) across 65 counterparties (prev. 70).


• EFFR flat at 5.33% as of Jan 12th, volumes fall to USD 93bln from USD 96bln.


• US sold USD 72bln of 6-month bills at 4.975%, covered 3.17x; sold USD 79bln of 3-month bills at 5.225%, covered 2.99x; sold USD 70bln of 42-day CMBs at 5.285%, covered 2.89x.


• US raises 4-, 8-, and 17-week bill auction sizes by USD 5bln, 5bln, and 2bln, respectively, at USD 85bln, 85bln, and 58bln; 4- and 8-week to be sold on Jan 18th and 17-week bills on Jan 17th; all to settle on Jan 23rd.

16 Jan 2024 - 20:55- Fixed IncomeData- Source: Newsquawk