Assessing Tuesday’s Flattening

A flat re-open for TYU2, with the contract +0-07 at 116-29+

• To recap, the cash Tsy curve twist flattened on Tuesday, with 2s running 0.5bp cheaper while the longer end was ~3.5bp richer come the bell. TYU2 failed to test its early session highs on the rally into the bell.
• Weaker consumer confidence data triggered a move lower for equities and bid in Tsys, while the latest Richmond Fed manufacturing print was also on the soft side.
• Some pointed to late headlines surrounding Turkey OK’ing Sweden & Finland’s route into the NATO alliance as a trigger for an extension of the moves, with stocks crashing lower into the bell. Note that Tuesday’s moves went against the general expectations surrounding wider rebalancing flows (which have pointed to support for equities and pressure on bonds ahead of month-, quarter, half-end).
• A weak round of 7-Year supply provided some counter to the rally that built as we moved through the NY day (coming after yesterday’s soft 5-Year supply), although a bid came back in ahead of the bell as equities slid further. In terms of auction specific, 7s tailed by a little over 2bp, with the cover ratio moderating to closer to average levels as dealer participation jumped back above its own recent averages.
• Core EGBs had led the space lower ahead of NY dealing, aided by positive news surrounding COVID-related quarantine periods for international travel to China and some hawkish ECB speak (although the BTP/Bund spread tightened as policymakers gave their views on anti-fragmentation tools, with confirmation that PEPP flexibility will be activated on Friday).
• There isn’t much in the way of tier 1 risk events on Wednesday’s Asia-Pac docket. Looking ahead, Wednesday’s NY session will see the final Q1 GDP print, weekly MBA mortgage apps data and Fedspeak from Powell, Mester & Bullard.