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Inflation Easing But Not Over

US TSYS

Early session highs around the opening bell were short lived Wednesday -- support for Tsy futures in lead-up to import/export prices evaporated despite the weaker than forecasted August import price data:

  • Prices for U.S. imports decreased 0.3 percent in August following a 0.4-percent advance in July, while Export prices rose 0.4 percent in August, after increasing 1.1 percent the previous month.
Hard to explain the steady sell-off in rates after the softer price data would seem to underscore cooling inflation pressures evident after Tue's CPI. One explanation is Tue's rally was overdone, that CPI was "off the boil but still hot" as Wells Fargo strategists said:

While August's softer-than-expected CPI reading lent "credence to the Fed's view that the flurry of inflation experienced earlier this year will prove 'transitory' .. inflation pressures remain strong beyond pandemic-affected categories."

Current session trade included some flatteners:

  • -9,767 FVZ1 123-20.25, post-time bid at 0930:00ET vs. +4,001 UXYZ1 148-13 post-time offer
  • overnight/late Tuesday Block: 5s/ultra-bond flattener: -9,409 FVZ 123-21.25, sell through 123-21.5 post-time bid at 2339:11ET vs. +1,362 WNZ 200-00, nuy through 199-26 post time offer

Background color on large 10Y Block sale (-10,327 TYZ1 at 133-12 (-7.5 and below session low of 133-13). Sources say was dv01 neutral spd vs. 4,720 RXZ1 at 171.60, and a likely unwind as well. Trigger for executing the spd is another matter.
The 2-Yr yield is up 0.4bps at 0.2111%, 5-Yr is up 1.3bps at 0.7983%, 10-Yr is up 1.9bps at 1.3022%, and 30-Yr is up 0.7bps at 1.8659%.

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