Flat Start After Bull Steepening

TYH2 operating around late NY levels, near the middle of Wednesday’s range, last +0-01+ at 125-27+.

• The front end of the curve led the bid on Wednesday, as the major benchmarks ultimately richened by ~1-6bp, with bull steepening observed.
• The lack of fresh hawkish impulse from the minutes covering the latest FOMC decision (although Fed debate has clearly evolved since then, and the minutes did note that “most participants suggested that a faster pace of increases in the target range for the federal-funds rate than in the post-2015 period would likely be warranted”) and a lack of firm detail re: the Fed’s B/S runoff plan (“current economic and financial conditions would likely warrant a faster pace of balance sheet runoff than during the period of balance sheet reduction from 2017 to 2019”) provided some cushion for the space, allowing the front end to extend its outperformance on the day. One takeaway of note from the minutes was that “many participants commented that sales of agency MBS or reinvesting some portion of principal payments received from agency MBS into Treasury securities may be appropriate at some point in the future to enable suitable progress toward a longer-run SOMA portfolio composition consisting primarily of Treasury securities.”
• A much firmer than expected round of U.S. retail sales data provided some brief downward pressure earlier in the session (prior readings were marked lower, while some internals weren’t as strong as the headline).
• 20-Year Tsy supply was solid, stopping on the screws, with the cover ratio holding steady, pretty much in line with the recent auction averages. Dealer takedown was marginally lower than the previous auction, below its own recent average.
• The space cheapened away from richest levels late in the session, seemingly on the back of comments from a senior Iranian Foreign Ministry official, who noted that “after weeks of intense negotiations, we have come closer to an agreement than ever, but nothing has been agreed until everything has been agreed,” with regards to the nuclear talks in Vienna.
• Australian labour market data headlines the Asia-Pac docket. Looking ahead, weekly jobless claims, housing starts, building permits and Philly Fed activity data headline In NY hours. We will also get Fedspeak from Bullard & Mester, as well as 30-Year TIPS supply.