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Further Paring Of Risk-Off Moves, 3Y Auction To Offer Demand Test Amidst Volatility

US TSYS
  • Treasuries have lifted off session lows with a recent softening in equity futures, but hold most of the extension of yesterday’s second half selling pressure.
  • The net move lower is aided by a rebound in Japanese equities, the RBA holding along with a slightly more hawkish tone and SF Fed’s Daly (’24 voter) characterizing the labor market as reasonably solid.
  • There is no scheduled Fedspeak today. We wouldn’t be surprised to see further commentary cautioning on overreacting to one data print, but we suspect there is only so much reaction this can now have.
  • That said, today’s data is limited to international trade -- we likely have to wait for Thursday’s weekly jobless claims for the next US macro steer -- which leaves sentiment in the driving seat until the $58bn 3Y auction at 1300ET offers a test of demand in volatile markets.
  • In the interim, emergency cut odds have mostly dissipated and September cut pricing has dipped to just under 50bps, whilst the 115bp of cuts to end-2024 has been trimmed by 20bps since ISM services and 33bps from dovish extremes.
  • TYU4 is at 113-17+ (- 17) off earlier lows of 113-12, currently holding a level around the 76.4% retracement of the post-payrolls rally to 115-03+. Firmer support isn’t seen until 112-21 (Aug 2 low).
  • Cash yields sit between 4.5-8bp higher, with increases led by 7s. 2s at 3.975% haven't been able to push above 4%. with a high of 3.9977% (4.12% pre-payrolls).
  • 2s10s at -11.7bps consolidates yesterday’s pullback off brief disinversion for the first time since mid-2022.
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