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Continued U.S. Tsy Sales Spill Over, Lack Of Hawkish BoJ Surprises Fails To Offer Reprieve

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The Treasuries tumbled as cash trading resumed after a U.S. holiday, with voices pointing to a more aggressive policy tightening from the Fed growing louder still. Renewed weakness in U.S. Treasuries spilled over into the Asia-Pac core FI space, countering any potential impact of the BoJ's monetary policy decision announcement, as some of the more hawkish scenarios constructed based on recent source stories failed to materialise.

  • Last week's RTRS piece noting that the BoJ were debating how to begin messaging an eventual (albeit not imminent) rate hike raised the perceived odds of the Bank dropping some hints re: potential departure from their ultra-loose policy stance. The statement contained no such indications, as the BoJ kept the main policy settings unchanged and altered their economic forecasts broadly in line with expectations. They upgraded the inflation projections for FY2022 & FY2023 and dropped their long-standing view that price risks are skewed to the downside, but struck some cautious notes on growth outlook and did not communicate any shift in policy. The decision came as local markets were shut for a lunch break, but JGB futures retreated once trading resumed, as post-BoJ musings failed to counter the spillover from retreating U.S. Tsys. JBH2 last trades at 150.80, 3 ticks shy of previous settlement, gradually edging away from its session low of 150.68. Cash JGB yields are marginally mixed as we type, off the slightly depressed levels seen in early trade. Focus turns to the press conference with BoJ Gov Kuroda, which may shed some more light on what we heard from the Bank today.
  • T-Notes posted a fresh leg lower once the BoJ risk was out of the way, with cash Tsys taking a nosedive in tandem with the benchmark futures contract. TYH2 last changes hands -0-17+ at 127-20+, moving away from its session low of 127-15 over the last hour or so. Eurodollar futures run up to 7.5 ticks lower through the reds. Bear flattening remains evident in U.S. Tsy curve, with yields last seen 3.9-7.2bp higher, slightly off earlier highs & flats. The yield on 2-year notes punched crossed above the 1% mark, with fresh cycle highs also reached by 10-year (north of 1.85%) and 30-year (above 2.18%) yields. The U.S. docket is headlined by the monthly Empire Manufacturing Survey today.
  • Offshore impetus was the primary driver of ACGBs in the absence of notable local catalysts. Aussie bond futures (YM last -4.0 & XM -3.5) followed in the footsteps of their major peers and have now moved away from lows printed in the wake of the downswing led by U.S. Tsys. Bills run 1-7 ticks lower through the reds. Cash ACGB yields trade 2.3-5.5bp higher across a flattened curve.

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