All About Fed Rate Hike Premium

TYM2 operates around late NY levels, a touch above Monday’s trough, last +0-02+ at 123-08+.

• To recap, Monday saw Fed Chair Powell underline his openness to a 50bp rate hike, if appropriate, allowing the already notable weakness in the Tsy space to extend during NY hours. The front end led the way lower, with 2s finishing ~18bp cheaper on the day, while 30s were 10bp or so cheaper, as the curve bear flattened. Note that the 5-/30-Year yield spread hit the lowest level observed since ’07 in the process. Several block FVM2 sales (totalling 15K lots, either side of Powell’s comments) also helped the space cheapen, alongside a heavy corporate issuance docket. Note that Atlanta Fed President Bostic (’24 voter) flagged a need to get moving “quickly” on B/S reduction, while noting that he is not wedded to the idea of moving in 25bp increments when it comes to tightening. This helped the space lower in early NY hours. There is ~190bp of tightening now priced through the Dec FOMC, up from ~165bp on Friday.
• The OIS strip now prices ~42bp of tightening for the Fed’s May meeting, up from ~38bp at Friday’s close.
• There isn’t much in the way of tier 1 risk slated for Asia-Pac hours on Tuesday. NY hours will see Richmond Fed manufacturing activity data complimented by Fedspeak from Williams, Mester (’22 voter) & Daly (’24 voter).