Back The Other Way

A flat re-open for TYM2, last dealing +0-06 at 118-08.

• To recap, the Tsy curve ran cheaper on Thursday, with the major benchmark Tsys finishing 6-11 bp cheaper as bears chipped away at the initial FOMC-inspired rally.
• Growth and inflation worry was back at the fore on Thursday (from a headline perspective), after Powell’s pushback against the idea of 75bp rate hikes facilitated an unwind of some of the tightening embedded into the short end post-FOMC. Soft Chinese Caixin services PMI data and the BoE’s rhetoric surrounding its latest 25bp rate hike fed growth/inflation worries, before cheapening took hold in early NY hours. Still, the space managed to finish a little above worst levels of the day.
• Note that the cheapening and steepening was a little at odds with the wider headline flow, with real yields moving higher and the longer end leading the move. U.S. 10s managed to extend on their recent foray above 3.00%, tagging a fresh cycle high in the process, with the move in the Tsy space being real yield driven. 30s also managed to tag fresh cycle highs in yield terms.
• So what else could have driven the move?
• Some flagged IG issuance hedging and Tsy auction setup as potential bearish factors. A tightening of longer dated invoice spreads indicated that futures were driving the cheapening, with longer dated swap spreads also narrowing, suggesting that swap flows were the laggard not the driver.
• Unit labour cost data was firmer than expected, which provided another source of pressure.
• Stocks traded heavily on the day, with the 3 major indices losing 3-5%, although this provided little meaningful cushion for Tsy bulls.
• There isn’t much in the way of tier 1 risk events to flag during Asia-Pac hours, but the return of Japanese markets will give us cash Tsy trade during the Asia-Pac session for the first time since Monday. Looking ahead, Friday’s NFP print headlines the domestic data calendar, while a deluge of Fedspeak is due from Williams, Waller, Bullard, Kashkari, Daly & Bostic (Bullard & Daly will speak after market).