All About The Caps

Tsys operate shy of best levels as we move towards London trade, after a couple of rounds of richening were seen in Asia (with the second round failing to extend on the first round), with some of the gains then pared. It seems that growth worries stemming from the Fed’s B/S run off plans drove the bid in Asia. TYM2 +0-09 at 120-31, 0-06+ shy of the session peak, operating around the middle of its Asia range on volume of ~145K. Cash Tsys are 1.5-3.0bp richer across the curve, with 5s outperforming and bull steepening apparent. The 2- to 10-Year zone printed through Wednesday’s yield troughs, with the more pronounced breaks coming in the front end of the curve, but those benchmarks now operate back around Wednesday’s lows (in yield terms). Asia flow was headlined by block sales of FVK2 113.25 puts (-5K in total) and block FV/TY flow (2 blocks totalling 9,016 vs. 5,553, potentially steepener flow, but unsure).

• To recap, the minutes from the March FOMC meeting saw the Fed outline the parameters that it has identified when it comes to shrinking its B/S. The Fed will limit B/S runoff to $95bn/month ($60bn Tsys, $35bn MBS), phased in over 3 months/modestly longer (if market conditions continue to warrant) with all indications that the formal announcement will come at the May FOMC meeting. Interestingly, many participants would have preferred to hike rates by 50bp at the March meeting, although Ukraine proved to be the limiting factor on this front (Bullard was the only dissenter who called for a 50bp hike), with many participants noting that “one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified.” Market reaction was two-way in nature, with benchmark yields across the curve finishing Wednesday around pre-minute levels after fresh YtD highs were registered across the curve. The 2-/10-Year and 5-/30-Year yield curves went out around session steeps, as the wider curve twist steepened.
• Weekly jobless claims data and Fedspeak from Bullard (’22 voter), Bostic (’24 voter) & Evans (’23 voter) will cross during NY hours.