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Initial Weakness Reverses, Stemming Yield Charge on 3.50%

US TSYS SUMMARY
  • Treasury futures initially sold off through European hours, with prices reversing the entirety of the post-FOMC move. Prices dipped to touch 114-10 follow rate hikes from the Swiss, UK and Taiwanese central banks, which helped the 10y yield narrow in on the key upside psychological level at 3.50%.
  • This price action soon reversed, however, as equity weakness persisted and as reports continued to disclose more detail on the ECB's anti-fragmentation tool proposals. The reports suggested the ECB will have tolerance bands for peripheral European bond yield spreads, and the central bank could intervene to prevent disjointed markets from hampered the monetary policy transmission mechanism.
  • The curve traded very slightly steeper, with 2y yields the largest mover. This tipped the 2y yield back to the week's lows ahead of the close, marking a ~30bps turnaround from the pre-FOMC high.
  • The trend needle in Treasuries points south after this week’s weakness. The break of key support at 116-21, May 9 low, confirmed an extension of the bear leg from May 26 and a resumption of the primary downtrend. The move lower opens 114-00 next.
  • Bank of Japan is the main risk event overnight before Fed Chair Powell speaks on Friday, due to deliver welcoming remarks at the Inaugural Conference on the International Roles of the US Dollar, in Washington DC.
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