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Implications of Curve Flattening Ahead FOMC, Tsy Refunding

US TSYS
  • Treasury futures running mixed after the bell, curves broadly flatter (2s10s -5.251 at -30.065) as bonds continue to outperform following US Tsy cut Q1 borrow est's from $816B to $760B late Monday with fcus on tomorrow's TBAC refunding annc at 0830ET.
  • Tsys support evaporated, particularly in the short end, after higher than expected JOLTS job openings at 9.026m (cons 8.75m) in Dec after an upward revised 8.93m (initial 8.79m) in Nov. Meanwhile, the Conference Board consumer confidence figure may have been in line with expectations in January but the labor market differential increased strongly. It increased from 27.3 to 35.7 for its highest level since April, whilst the 8.4pt increase was the strongest monthly increase since May’21.
  • Concerted tone change in the curve ahead of the Tsy refunding as well as tomorrow's FOMC policy annc. Steepener unwinds a contributing factor over the last 24 hours:
    • Flattener post at 1152:47ET Tuesday: -24,007 TUH4 102-17.88, sell through 102-18.62 post time bid, DV01 $917,000 vs. +9,846 UXYH4 115-29, post time bid, DV01 $901,800.
    • Large flattener posted at 1612:49ET late Monday: -21,742 FVH4 107-30, sell through 107-31.25 post time bid, DV01 $921,800 vs. +4,432 WNH4 126-30, post time offer, DV01 $909,800.
  • As noted in the option summary, projected rate cuts have receded: January 2024 cumulative -.5bp at 5.324%, March 2024 chance of 25bp rate cut -40.7% vs. -46.5% this morning w/ cumulative of -10.7bp at 5.222%, May 2024 at -78.4% vs. -82.7% earlier w/ cumulative -30.3bp at 5.026%, June 2024 -94.6% vs. -98.1% earlier w/ cumulative -53.9bp at 4.790%. Fed terminal at 5.325% in Feb'24.
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