Asia Fades Some The NY Rally

Asia-Pac participants were seemingly keen to fade some of Monday’s NY Tsy richening (which was in part related to month-end index extension dynamics) allowing core FI markets to move off of their Monday/early Asia peaks. Surprise expansionary readings for both the Chinese official and Caixin manufacturing PMI prints added a further source of (light) pressure, with the official nonmanufacturing PMI release also topping wider expectations. This leaves TYM2 -0-06 at 127-08 ahead of European hours, operating a little off the base of its 0-09 overnight range, on ~150K lots. Cash Tsys run 2.5-3.5bp cheaper across the curve.

• To recap, U.S. Tsys were underpinned on Monday, with the Western weekend sanctions on Russia (and the fallout from the actions), a lack of progress in Monday’s Ukraine-Russia dialogue and continued fighting in Ukraine underpinning the space. Cash Tsys were 11-15bp richer on the day, with the 5- to 7-Year zone leading the way. A block buy in WNM2 (+2K) and month-end related rebalancing also seemed to generate a bid in the space during the NY afternoon. More granularly, we saw some pressure in USD-funding markets, with FRA/OIS wider and USD demand evident in the cross-currency basis space. This may have been driven by the latest note of caution from Credit Suisse’s Pozsar, who flagged the need for the banks to re-open USD swap lines in the wake of the Russia’s partial expulsion from the SWIFT messaging system. Still, pressures in that space eased back from extremes as we moved through the day. STIR trade was headlined by block buyers in EDH2 & EDU2 (+50K apiece), with a block buy of EDM2 (+20K) also observed. Fedspeak saw Bostic (’24 voter) reiterate the need to move off of an emergency rate stance, with his current preference being for 25bp increment moves (although he stressed that the size of future hikes should be inflation dependent)
• NY hours will see the latest ISM m’fing survey headline, while Fedspeak will come via Mester (’22 voter) & Bostic (’24 voter).