TREASURY WRAP: T-NOTE (M1) FUTURES SETTLES 2+ TICKS HIGHER AT 132-24

Analysis details (20:35)

Treasuries were mixed on Friday after a sloppy jobs report saw the belly bid hard while approaching refunding supply kept duration cheaper, seeing 5s30s rise by over 6bps. 2s -1.2bps at 0.145%, 5s -2.4bps at 0.773%, 10s +1.6bps at 1.577%, 30s +3.6bps at 2.272%; TYM1 volumes were solid. 5yr TIPS -4.9bps at -1.922%, 10yr TIPS -2.8bps at -0.919%, 30yr TIPS -0.4bps at -0.038%. EDU2 +0.025 at 99.720, EDU3 +0.060 at 99.225, EDU4 +0.055 at 98.600. SOFR and EFFR unchanged at 1bp and 6bps. NY Fed RRP demand rises to USD 161.856bln across 28 bidders (prev. USD 154.92bln across 20 bidders).

Bonds were offered out of APAC on the back of decent Chinese economic data, and no signs of seasonal, post-Golden Week buying ahead of the US jobs report. There was also some spill-over weakness in the European morning on the back of some comments from ECB commentary about the potential for purchase tapering in June ahead of the central bank reaching its full PEPP remit. The action for the day arrived, unsurprisingly, on the back of the 266k US jobs added print, well below the expected 978k, while unemployment saw a surprise rise to 6.1% from 6.0%. There was a knee-jerk drop lower in yields, seeing cash 10s hit an intra-day low of 1.47%, a support level from early March, before paring half the move within the space of 10 minutes - there were close to 800k TYM1 contracts traded in the 30 minutes after the release. As the session progressed and the dust settled (shorts finished covering) weakness in duration resumed, with next week's refunding (2s, 10s, and 30s) on the horizon and dealers likely on the defensive to make concession, seeing 5s30s steepen by over 6bps on the day as the belly held firmer. 

The belly was the hardest bid part of the curve on the back of the jobs report, both in USTs and Eurodollars, as the latter saw traders pare back rate hike expectations in the mid-curve. It is perhaps no surprise the belly would be most reactive to the paring of expectations for a hawkish policy shift. The market has over months been embedding risk premium from a few years out the curve forward on the notion that after a couple of years of the Fed's ZLB policy (under the AIT framework), while the economy runs hot, the Fed will likely have to make up for that in the medium-/long-term with a more aggressive rate hike cycle. Thus, as today's report showed that the path to recovery will likely be bumpy, traders have somewhat downgraded the need for the tightening (hikes) in the future as the immediate years ahead might not run as hot as imagined, making it harder to achieve 2% average inflation. Traders today noted that rates vol in the front-end (swaptions) have come down, reflective of a Fed on hold for longer view.

07 May 2021 - 20:35- Fixed IncomeResearch Sheet- Source: Newsquawk