Asia Sees Consolidation After Monday’s Sell Off

The combination of news of the latest localised lockdown in China (covering some neighbourhoods in Zhengzhou, Henan) and regulatory driven pressure in Chinese equities was seemingly enough to allow Tsys to move off their Asia lows, leaving TYH2 +0-01 at typing, printing 129-15. Cash Tsys sit ~1bp cheaper to virtually unchanged across the curve, with very modest twist flattening in play after yesterday’s bear steepening. Note that bears have so far failed to force a test of initial technical support (129-12+), with a low of 129-13+ registered overnight, as the contract stuck to a 0-05+ range on ~100K lots. On the flow side, a 15K block seller of the FVG2 120.50/120.00 put spread headlined, with modest downside interest in various TYH2 put strategies also observed. The US$ swappable issuance pipeline built (headlined by Nomura, NAB & Credit Agricole). Firmer than expected Chinese Caixin manufacturing PMI data had no impact on the space.

• To recap, aggressive bear steepening dominated the first NY session of ’22, with 2s closing ~4bp cheaper, while the longer end of the curve was ~12bp cheaper come the bell. The S&P 500 lodged a fresh all-time high in closing terms but failed to top the intraday all-time highs registered last week. TYH2 tested technical support in the form of the 76.4% retracement of the Nov 24 - Dec 20 rally (129-12+), which held and represented the low of the day. 30-Year yields closed above 2.00% for the first time since Nov 23 (when Omicron worry first bit). It wasn’t a purely one-way story for risk assets, with equity futures briefly trading lower after the NY cash open, while Tsys extended their weakness in early NY hours. Breakevens widened on the day. The resumption of corporate issuance provided a further source of pressure (~$11bn of $IG). On the flow side, a late block seller of WN futures was seen (-3K), while over 70K of the TYH2 127.00 puts were lifted on screen throughout the day (paper paid 0-14 on ~21K, before 0-15 was paid on 50K), Relatively widespread holidays (observance of the turn of the calendar year in various financial centres in Asia, London & Canada) limited broader liquidity, although TY volume topped 1.3mn on the day.
• Looking ahead, the NY docket will bring the release of the latest ISM manufacturing survey & JOLTS jobs data. Elsewhere, Minneapolis Fed President (dove, ’23 voter) will speak re: the economy.