Asia Buys Tsys Post-FOMC

There was a lack of overt headline flow to drive the broader core fixed income space during Asia-Pac hours, but a post-Fed rally in U.S. Tsys still managed to materialise.

• TYM2 is +0-14 into European hours, printing 124-21+, 0-04 shy of the peak of its 0-21+ overnight range, but still comfortably unwinding the post-FOMC sell off. Cash Tsys run 2.5-5.0bp richer across the curve, with 10s leading. This comes after Wednesday’s post-FOMC twist flattening, which played out against a hawkish dot plot (median dot of 1.875% paints to another 6.5 25bp hikes across the remaining 6 meetings of ’22) and Fed Chair Powell noting “excellent progress” when it comes to discussions surrounding B/S reduction, with a firm move on that front potentially coming as soon as May. While there was nothing in the way of notable headline flow to drive the move, we flag the following factors as potential drivers: touted aggressive long end demand out of Taiwan, the generic yield pickup argument post-FOMC, some growth worry given the aggressive dot plot (with the 5-/10-Year yield spread flipping in and out of inversion post-FOMC) & some lingering worry re: Russia-Ukraine as the Ukrainian President labelled the ongoing discussions between the two nations as difficult. The Tsy bid dragged Eurodollar futures higher, with those contracts 4-7bp richer through the reds, with OIS pricing a year-end Fed Funds rate of ~1.90%, virtually in line with the new dot plot median. Looking ahead, NY hours will be headlined by weekly jobless claims readings, housing starts & building permits data, industrial production and the latest survey from the Philly Fed. Additionally, the latest BoE monetary policy decision will provide some interest during the London-NY crossover.
• The pull higher in U.S. Tsys supported the JGB space during the Tokyo session, with futures hitting the bell +3, reversing overnight losses, while cash JGBs were little changed to ~1.5bp richer across the curve, with super-long paper outperforming, facilitating some bull flattening. The spill over of the bid in the U.S. Tsy space outweighed any impulse from the bid in domestic equities (the Nikkei added ~3.5%). There wasn’t anything in the way of a tangible reaction to Wednesday’s earthquake which struck in the same region as the earthquake that triggered the horrific Fukushima disaster back in ’11 (loss of life stands at 4 at present).
• Aussie bond futures were subjected to a ~4 hour trading halt owing to technical issues re: the ASX 24 trading system (with the outage including the release of the latest monthly labour market report). The major contracts moved above pre-halt levels before fading back, with the initial post-re-open cheapening impulse from the firmer than expected labour market data fading. Why? Firstly, U.S. Tsys are bid, which will have created some spill over into the ACGB space. Secondly, although some have rolled forward their RBA lift off expectations to June, that scenario is fully priced by the market already. As we noted earlier, this labour market report isn’t a gamechanger in isolation (at least when it comes to market pricing), given the Bank’s focus on labour costs (yes, tightening labour markets will feed through into labour costs, but the explicit impact of the February labour market dynamic on labour costs is not observable at this stage and doesn’t meaningfully advance the likely timing of rate hikes from the market’s perspective), allowing the spill over bid from U.S. Tsys to dominate. YM -6.5 & XM -1.0 at the close, with cash 3s providing the weak point on the ACGB curve, which twist flattened on the day, pivoting around 12s.