TREASURY WRAP: T-NOTE (M1) FUTURES SETTLED 17 TICKS LOWER AT 131-29+

Analysis details (20:18)

The belly led a vicious Treasury sell-off on Wednesday after a decent 10-year auction failed to heal the damage from a record-breaking hot CPI print. 2s +0.4bps at 0.165%, 5s +5.4bps at 0.855%, 10s +6.6bps at 1.690%, 20s +6.3bps at 2.289%, 30s +5.6bps at 2.408%; TYM1 volumes were well above average. 5yr TIPS +2.6bps at -1.888%, 10yr TIPS +4.4bps at -0.871%, 30yr TIPS +7.4bps at 0.039%. SOFR and EFFR unchanged at 1bp and 6bps.  

OPS & SALES: Fed bought USD 1.735bln 20-30yr Treasuries, O/C 3.1x (prev. 3.2x). US sold USD 41bln of 10-year notes, stop-thru 1.3bps; sold USD 35bln 119-day CMBs at 2bps, covered 3.24x. NY Fed RRP demand rises to a new YTD peak at USD 209.3bln across 39 bidders (prev. USD 181.8bln across 28 bidders). 

THE DAY: Treasuries were modestly bid overnight, clawing back some losses from Tuesday amid COVID concerns in Asia, particularly out of chip supply fulcrum Taiwan, while the geopolitical risk flare in Israel didn't exactly embolden the risk tone. It wasn't till the Europe/US handover that offers resurfaced, building into approaching refunding auctions. The selling was at first slow, then all of a sudden, as April CPI printed the highest core Y/Y figure since the mid-90s, while even the core M/M rose at an eye-gouging 0.9% pace. The well above forecast print saw 700k TYM1 traded in the hour after it (around half the volume of a whole average day) as the belly of the curve led the sell-off, seeing Eurodollars and USTs mark a complete reversal of the post-NFP bid, re-embedding term premia as participants begin to question the nerve of the Fed's "look through all inflation as transitory". While employment may not be where the Fed wants it, as Clarida reiterated today, there is now a relatively higher chance of inflation running too hot to force a Fed cave before the labour market's healing is complete. As the dust settled from the report, USTs saw further downside, with bulls cautions to reengage ahead of the approaching 10-year auction - the spillover pressures saw German Bund yields continue to print new cycle peaks. Bulls will have made a sigh of relief after the decent 10-year auction, which stopped though by 1.3bps, covered more than average, and saw decent participation from the non-dealer community for the USD 41bln new issue, particularly from Indirects, which are often seen as a proxy for foreign demand. While a solid auction, it was not enough to see a meaningful pare back in yields, with TYM1 contracts rising by just a few ticks, before chopping around lower into the futures settlement. Participants now look to Thursday's 30-year auction to see if that 10-year demand from today sustains. 

12 May 2021 - 20:18- Fixed IncomeResearch Sheet- Source: Newsquawk