Back The Other Way

TYU2 is flat at the re-open after going out at session lows on Wednesday, dealing -0-05 at 118-28+.

• To recap, the front end led the way lower on Wednesday, with the major Tsy benchmarks cheapening by 8-19bp, as the curve bear flattened, more than revrsing the richening that was seen into early NY trade. A stronger than expected ISM Services survey (in the wake of a slightly stronger than flash final Markit services PMI print) and a lack of dovish surprise in the minutes covering the latest FOMC meeting (with the readout seemingly underscoring the Fed’s desire to take policy into restrictive territory to fight inflation, even if it sacrifices economic growth) were the key drivers. Note that the minutes flagged that “participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting,” although a 75bp move is judged to be the more likely outcome given recent Fedspeak. This left Fed dated OIS pricing in ~72bp of tightening at that meeting come Wednesday’s close. Further out, there was some interest in the scope for a pause in tightening later this year (not new) as the minutes underscored the idea that “with the federal funds rate expected to be near or above estimates of its longer-run level later this year, the Committee would then be well positioned to determine the appropriate pace of further policy firming and the extent to which economic developments warranted policy adjustments.”
• A couple of block sales in TU futures (-7.0K & -9.4K) kept the pressure on the short end of the curve into the bell, with 2- & 3-Year yields breaching the 3.00% level late in the day, as the 2-/10-Year yield curve closed in inverted territory (around -8bp).
• There isn’t much in terms of wider macro highlights when it comes to the Asia-Pac calendar, with participants looking ahead to Fedspeak from Governor Waller & St. Louis Fed President Bullard (’22 voter) on Thursday, in addition to the release of the weekly jobless claims and monthly challenger jobs cuts data.