MNI ASIA MARKETS ANALYSIS: Tsy Track Binds/Gilts Lower

US TSY SUMMARY: Rates Weaker/Off Lows

Tsys finished the session weaker but off midday lows. Rates followed Bunds, Gilts lower in early trade after BoE Vlieghe commented early rate hikes possible if there is a smooth furlough transition. Sideways trade after first significant data of wk: Durable goods weaker than expected, though higher revisions. Initial jobless claims slightly better than expected, while GDP unch in latest reading (vs expectations of 0.1pp revision higher).

• Bonds lead a gradual move lower, yld curves bear steepening in late morning trade. TYM1 -9.5/32, 132-19.5 last, still well above April 13/29 key support of 131-18.5. Trading desks noted two-way positioning w/better selling from props and real$ accts, central bank buying in 10s earlier. Curve-wise, trading desks report real- and fast$ doing 5s30s steepeners. No deal-tied flows with corporate issuers sidelined ahead shortened Friday/extended holiday weekend. Some pre-auction short-sets ahead final leg week's Tsy supply: $62B 7Y note.
• Decent auction results w/ high yield of 1.285% vs. 1.292% WI. Tsys holding off session lows. Bid-to-cover: 2.41x well over 2.24x 5 month avg, and highest since Sep '20. Indirect take-up of 59.57 well over the 5 month average of 55.35% but well shy of Jan's 64.09%. Primary dealer take-up 19.73% well below 25.83% 5 month avg (compares to February's >1Y high of 39.80%.) Direct take-up picks up of 20.70 vs. 18.79% 5M avg.
• The 2-Yr yield is down 0.4bps at 0.1446%, 5-Yr is up 3.2bps at 0.8139%, 10-Yr is up 3.2bps at 1.6079%, and 30-Yr is up 3.2bps at 2.2882%.

SHORT TERM RATES

US DOLLAR LIBOR: Latest Settles

• O/N -0.00188 at 0.05700% (-0.00275/wk)
• 1 Month -0.00037 to 0.09213% (+0.00050/wk)
• 3 Month -0.00037 to 0.13463% (-0.01237/wk) ** (Record Low)
• 6 Month -0.00062 to 0.17113% (-0.00762/wk)
• 1 Year -0.00313 to 0.24875% (-0.01088/wk)

• Daily Effective Fed Funds Rate: 0.06% volume: $64B
• Daily Overnight Bank Funding Rate: 0.04% volume: $262B

• Secured Overnight Financing Rate (SOFR): 0.01%, $869B
• Broad General Collateral Rate (BGCR): 0.01%, $372B
• Tri-Party General Collateral Rate (TGCR): 0.01%, $349B
• (rate, volume levels reflect prior session)

• Tsys 22.5Y-30Y, $2.001B accepted vs. $6.713B submission
• Next scheduled purchases:
• Fri 5/28 1010-1030ET: Tsy 0Y-2.25Y, appr $12.425B

MONTH-END EXTENSIONS: Barclays/Bbg Extension Estimates for US

UPDATED forecast summary compared to avg increase for prior year and same time in 2020. TIPS 0.03Y. Note: MBS extension est surged to 0.22 from 0.13 prelim estimate.

EURODOLLAR/TREASURY OPTIONS SUMMARY

• +8,000 short Dec 97/98 call spds, 1.5
• +3,000 short Mar 90/92 put spds, 3.5 vs. 99.535/0.10%
• +1,000 Gold Sep 78/81 put spds 1.0 over 82/85 call spds
• +10,000 Blue Dec 78/83 2x1 put spds, 5.5
• Block, 5,000 short Dec 91/95 2x3 call spds, 6.5
• +5,000 short Sep 99.68/99.75 1x2 call spds, 0.5
• Overnight trade
• Block, 3,450 Blue Jul 87/88 2x3 call spds, 3.5
• 2,000 short Jun 96/97 call spds

• +20,000 TYU 129/134.5 put over risk reversals 8 net
• +2,400 TYN 130.75/131.5 2x1 put spds, 1cr
• -6,000 FVU 123.25/124.5 strangles, 41
• +5,000 TYN 130/131 put spds, 13
• +3,000 TYU 128/131.5 2x1 put spds, 53
• +2,000 TYU 130.5 puts, 43
• +2,000 TYQ 129.5 puts, 15
• -2,300 USN 158 calls, 47-41
• Overnight trade
• -10,000 TYN 131 puts, 15
• -3,500 TYN 131.5 puts, 29
• 2,500 TYN 131/131.5/132 put flys
• -5,000 TYU 134/135 call strip, 32-30
• +10,000 wk4 TY 131.25/131.5 put spds
• Block, -5,000 FVN 124 calls, 13.5
• +2,000 FVN 123.75 straddles, 40

EGBs-GILTS CASH CLOSE: BoE's Vlieghe Puts Pressure On Gilts

Thursday saw a weak session for the space, with the Bund and Gilt curves bear steepening.

• Biggest headline reaction of the day came from BoE Vlieghe, who commented at midday UK time that early rate hikes are possible if there is a smooth furlough transition.
• This sent Gilts lower, with Bunds following suit.
• ECB's Weidmann in contrast didn't add to the conversation on tapering.
• BTPs were sold across the curve at various points in the day, but the weakness in Bunds meant spreads compressed over the course of the session.
• We get French prelim May inflation and Eurozone confidence data on Friday, as well as an appearance by ECB Villeroy; Italy sells up to E8.5bln of BTP/CCTeu.

Closing yields/10-Yr Spreads to Bunds:

• Germany: The 2-Yr yield is up 1bps at -0.656%, 5-Yr is up 2.3bps at -0.554%, 10-Yr is up 3.4bps at -0.172%, and 30-Yr is up 4bps at 0.389%.
• UK: The 2-Yr yield is up 2.9bps at 0.052%, 5-Yr is up 4.7bps at 0.349%, 10-Yr is up 5.8bps at 0.81%, and 30-Yr is up 3.7bps at 1.319%.
• Italian BTP spread down 1.9bps at 110.8bps / Spanish spread down 0.2bps at 65.6bps

OPTIONS/EUROPE SUMMARY: Large Bund Downside Features

Thursday's options flow included:

• RXN1 170.5/169ps 1x2, bought for 14.5 in 5k
• RXN1 170/169.50 ps, bought for for 9 & 10 in 30.5k
  
• RXN1 171/172/173c fly sold at 22 and 21.5 in in 1k (liquidation)
• 2RH2 100.12/100ps, bought in 14k vs 100.37/100.50cs sold in 7k for 0.25 for the package
• 3RU1 100.25/100.00 combo bought for 0 in ~10k (+call)
• 0LZ1 99.50/99.625/99.75c fly, bought for 2.25 in 3k
• 0LZ1 99.62/99.37ps 1x2 was bought for 3 in 5k
• 0LZ1 99.50/62/75cl fly, bought for 2.25 in 6k
• 0LZ1 99.625^, bought for 21 in 3k
• 0LU1 99.87/100cs, bought for 0.75 in 5k
• 3LU1 99.12/00/87/75p condor vs 99.50/99.62cs, bought the condor for 1.25 in 5k
• 3LZ1 99.00/98.75/98.50p fly v 99.50/99.62cs, bought the fly for half in 10k

FOREX: GBP/JPY Nears Highest Level Since 2016

• After a particularly muted morning, currency markets picked up as outgoing BoE MPC member Vlieghe spoke on the future of the bank rate as the UK economy rolls off the pandemic-era furlough scheme.
• Vlieghe stated that an earlier-than-expected rate hike is possible should the transition from furlough to a post-pandemic labour market take place smoothly. In response, the Gilt curve steepened as the 10y yield rose, helping boost GBP across the board. GBP/JPY responded by narrowing the gap with 2018's 156.61. A break above here would mark the highest rate since 2016.
• Early month-end flow worked against the JPY Thursday, which fell against all others in G10. USD/JPY eyes 110.15 Fib resistance ahead of any test on the year's best level at 110.97.
• Focus Friday turns to Japanese jobless rate data, French prelim inflation, US trade balance, PCE data for April and the MNI Chicago PMI. G7 finance ministers also meet to discuss China's place in global trade, while ECB's Villeroy is due to speak.

FX OPTIONS: Expiries for May28 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1985-1.2000(E1.0bln), $1.2100-15(E561mln), $1.2185-1.2200(E1.8bln-EUR puts), $1.2210-20(E985mln), $1.2250-75(E1.9bln-EUR puts)
• USD/JPY: Y108.50-60($895mln), Y110.00($1.4bln-USD puts), Y110.50($976mln)
• GBP/USD: $1.4200(Gbp737mln-GBP puts)
• EUR/JPY: Y132.80-00(E723mln)
• EUR/CHF: Chf1.1000(E960mln-EUR puts)
• AUD/USD: $0.7750(A$524mln)
• USD/CAD: C$1.2000($640mln), C$1.2100($1.2bln)
• USD/MXN: Mxn19.75($1.3bln-USD puts)

PIPELINE: Limited Issuance Ahead Extended Holiday Weekend

• Date $MM Issuer (Priced *, Launch #)
• 05/27 $1.5B Mamoura 10Y +95, 30Y Formosa 3.4%
• $6.1B Priced Wednesday
• 05/26 $3B *Morgan Stanley 4NC3 fix to FRN +48
• 05/26 $2B *UniCredit $1B 6NC5 +120, $1B 11NV10 +155
• 05/26 $1.1B *Triton Container Int $500M 3Y +88, $600M 10Y +158

COMMODITIES: NatGas Dips on Large Build in Stockpiles

• Energy markets started the session slowly, before spillover buying from buoyant equity markets helped bolster sentiment. In response, WTI crude futures hit the week's best levels at $66.71. Resistance sits stronger at the mid-May high of $67.01.
• EIA NatGas Storage Chance came in ahead of expectations, with a build of 115 BCF. This weighed on NatGas futures, prompting markets to erase the entirety of the late Tuesday gains.
• Gold and silver ebbed lower for much of the Thursday session, pressing spot gold back below the psychological $1,900/oz mark. This relieves some of the overbought signals emanating from the 14-day RSI, which has edged off the multi-month highs printed earlier in the week.

EQUITIES: Market Get Mixed Messages From Biden Stimulus Plan

• Headline equity indices traded well Thursday, with the unveiling of Biden's $6 trillion budget helping bolster sentiment from the off. Cash markets traded in minor positive territory, with the S&P 500 rising over 0.3% into the close, while the NASDAQ comp lagged very slightly.
• Markets saw mixed messages in Biden's economic plan, with equities welcoming the broad-based fiscal stimulus before slipping on reported back-dated tax requirements. The capital gains tax is seen being notched higher, although Congressional approval will be required before proceeding with the change.
• Industrials and materials were best performing sectors state-side, with financials not far behind. Utilities and energy were the relative underperformers, although losses were muted.