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US TSY SUMMARY: Bond Auction Tail Reverses Post-CPI Rate Gains

Choppy session on a wide range -- rates finishing weaker -- nearly back to last week's lows. Rates and equities gapped lower following surge in June core CPI +0.9% vs. 0.4% exp.
  • Rising inflation more localized than systemic w/economists pointing to sharp rise in used car prices and supply-chain issues w/ semiconductors. Volume surged on post-data chop, markets posting modest gains amid two-way flow on lows lows.
  • Rates gradually climbed into midday but an unexpected Bond auction tail shook things up: Tsys gapped lower after $24B 30Y Bond auction re-open (912810SX7) tails 2.3Bp: 2.000% high yield vs. 1.977% WI; 2.19x bid-to-cover off 2.29x 5 auction avg.
  • 30YY climbed to 2.0537% post auction highs amid heavy volume. Sell stops contributed to the move. Equities traded weaker as well, but drawing some dip buy support ahead more bank earnings Wednesday.
  • SF Fed Pres Daly sees inflation as temporary, but positioned to taper late '21 - early '22.
  • The 2-Yr yield is up 2.8bps at 0.2548%, 5-Yr is up 5bps at 0.8444%, 10-Yr is up 4.5bps at 1.4099%, and 30-Yr is up 3.3bps at 2.0308%.

SHORT TERM RATES

US DOLLAR LIBOR: Latest Settles

  • O/N -0.00112 at 0.08563% (-0.00100/wk)
  • 1 Month -0.00262 to 0.09313% (-0.00700/wk)
  • 3 Month -0.00675 to 0.12613% (-0.00250/wk) ** (Record Low: 0.11800% on 6/14)
  • 6 Month -0.00288 to 0.15150% (+0.00050/wk)
  • 1 Year -0.00125 to 0.24325% (+0.00438/wk)
STIR: FRBNY EFFR for prior session:
  • Daily Effective Fed Funds Rate: 0.10% volume: $75B
  • Daily Overnight Bank Funding Rate: 0.08% volume: $256B
US TSYS: Repo Reference Rates
  • Secured Overnight Financing Rate (SOFR): 0.05%, $855B
  • Broad General Collateral Rate (BGCR): 0.05%, $359B
  • Tri-Party General Collateral Rate (TGCR): 0.05%, $331B
  • (rate, volume levels reflect prior session)
FED: NY Fed Operational Purchase
  • Tsy 4.5Y-7Y, $5.999B accepted vs. $17.024B submission
  • Next scheduled purchases:
  • Wed 7/14 1010-1030ET: Tsy 10Y-22.5Y, appr $1.425B
  • Wed 7/14 1500ET Update NY Fed Operational Purchase Schedule

FED: Reverse Repo Operations

NY Fed reverse repo usage climbs to $798.267B from 73 counterparties vs. $776.472B on Monday. Remains well off June 30 record high of $991.939B.

EURODOLLAR/TREASURY OPTIONS SUMMARY

Eurodollar Options:
  • +13,000 short Oct 91 puts, 2.0 and bid for more
  • +12,000 short Jul 99.68/99.75 call spds, 0.25
  • -40,000 Green Dec 99.25/99.62 call spds, 4.25
  • +3,000 Blue Mar 97.75/98.12 put spds, 7.5
  • +10,000 short Mar 99.75 calls, 1.5 vs. 99.36/0.10%
  • +1,000 Red Dec'22 99.50 straddles, 36.0
  • Overnight trade
  • 3,000 Blue Dec 97.50/97.87 put spds
  • 1,500 short Dec 99.37/99.62 put spds vs. 3,000 Green Dec 98.50 puts
  • 3,000 Green Dec 98.87 puts vs. 1,500 Blue Dec 98.12/98.37 put spds
  • 3,000 Blue Jul 85 puts, 0.5
Treasury Options:
  • +10,000 TYU 134.5 calls, 21 after paper sold down to 19 earlier
  • BLOCK, -8,134 TYU 132.5/134.5 strangles, 49
  • -8,300 TYU 132.5/134.5 strangles, 49
  • +10,000 wk3 TY 132/132.5 put spds, 3
  • -20,000 TYQ 133 puts, 13-12
  • -3,000 TYU 134.5 calls, 19
  • +1,000 USQ 163 calls, 46 vs. 162-15/0.41%
  • -6,000 FVQ 124/124.25 put spds, 13-13.5
  • +3,500 TYU 131 puts, 12
  • 3,500 TYU 137 calls, 4
  • Overnight trade
  • 3,000 TYQ 131.75/132.5 2x1 put spds
  • 3,200 TYQ 131 puts, 1

EGBs-GILTS CASH CLOSE: Shrugging Off U.S. Inflation Surprise

Tuesday saw mixed results for Bunds and Gilts, with periphery EGB spreads continuing to tighten throughout the session.

  • The biggest catalyst of the day - by some distance - was the much-higher-than-expected June inflation reading from the US, which caused global core FI yields to spike to session highs.
  • But 10Y Bund and Gilt yields then fell to session lows as the figure was seen as transitory. Gilts maintained their gains, while Bunds faded.
  • The data overshadowed massive supply in Europe: >E30bln in eurozone (Germany, Italy, Netherlands, EU syndication) and GBP7bln Gilt (Jan-39 syndication).
  • A rather quieter supply day Weds: Germany sells E4bln of Aug-31 Bund, while Portugal sells up to E1bln of OT. We also get UK inflation data and appearances by ECB's Schnabel and BOE's Ramsden.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

  • Germany: The 2-Yr yield is unchanged at -0.672%, 5-Yr is down 0.1bps at -0.599%, 10-Yr is up 0.1bps at -0.294%, and 30-Yr is up 0.6bps at 0.211%.
  • UK: The 2-Yr yield is down 0.1bps at 0.093%, 5-Yr is down 0.1bps at 0.295%, 10-Yr is down 1.9bps at 0.632%, and 30-Yr is down 3.3bps at 1.125%.
  • Italian BTP spread down 2.4bps at 100.9bps / Spanish down 2bps at 61.6bps

OPTIONS/EUROPE SUMMARY: Dec Sterling Stands Out

Tuesday's options flow included:

  • RXU1 173/172ps 1x1.5, bought for 10 in 2k
  • 3RU1 100.25/100.37cs vs 100.12/99.87ps, bought the cs for 3 in 2k (ref 100.25)
  • 3RU1 100.25^ vs 100.37c, sold at 9.75 in 2k
  • 3RZ1 100.12/99.87/99.62p fly sold at 2.5 in 1.5k
  • 3RZ1 100.50c, sold at half in 2.5k
  • LZ1 100p, bought for 13 in 12.5k
  • L Z1 100/100.125/100.25c fly 1x2.2x2.6 bought for half in 24.95k
  • 0LU1 99.62/99.75cs 1x2, sold at 3 in 5k

FOREX: Greenback Strength Prevails Following US Inflation Beat

  • The dollar index recovered from weakness over the past few sessions, slowly approaching last week's highs and the best levels seen since April, up half a percent on the day.
  • Despite another big set of beats in the US CPI release, an initial spike in the dollar was faded with a fairly muted immediate reaction seen in currencies.
  • However, as the session developed, with most pairs unable to trade back to pre-release levels, the USD gradually firmed across the board, extending on session highs late on Tuesday, in line with higher treasury yields. Particular weakness was seen in EURUSD (-0.62%), matching the July 7 low at 1.1982.
  • With the technical outlook remaining bearish, a sustained break of 1.1795, the Apr 6 low may expose key support at 1.1704, Mar 31 low.
  • Other pairs tracked the dollar index with GBP, AUD, NZD and CAD all losing just shy of 0.5%.
  • Notable moves in the EM space included weakness in MXN (-0.95%) and another substantial retreat for the South Africa Rand (-2.15%) amid escalating levels of domestic violence and looting.
  • Central bank decisions from the RBNZ and the BOC tomorrow, along with UK CPI and US PPI data.
  • Additionally, Fed's Powell is due to testify on the Semi-Annual Monetary Policy Report before the House Financial Services Committee, in Washington DC.

FOREX/Expiries for Jul14 NY cut 1000ET (Source DTCC)

  • EUR/USD: $1.1800-10(E1.1bln), $1.1850(E513mln), $1.1865-85(E996mln)
  • EUR/JPY: Y130.75(E880mln)
  • USD/CAD: C$1.2200($832mln)

PIPELINE: $3B IADB, $2.5B British Columbia Priced

  • Date $MM Issuer (Priced *, Launch #)
  • 07/13 $3B *IADB 7Y sustainable development bond +7
  • 07/13 $2.5B *Province of British Columbia 5Y +4
  • 07/13 $600M #MassMutual 5Y +40
  • 07/13 $Benchmark Interchile investor calls

EQUITIES: Solid Index Performance Belies Churn Below the Surface

  • The on-off theme of the reflation trade was again present on Tuesday, with tech names seeing solid gains at the expense of energy, materials and financials. The mixed performance below the surface belied the strength in index prices, with the S&P 500 cresting at a new alltime high. For the e-mini S&P, the new high watermark at 4383.75 raises focus on the next psychological level at 4400.
  • Earnings season got off to a poor start, with JPMorgan and Goldman Sachs both trading lower following their respective earnings reports, which saw trading revenue miss expectations at both firms.
  • In Europe, most indices traded flat, with the DAX, CAC-40 and FTSE-100 all closing within 1 point of the opening price. Spain's IBEX-35 was the standout, slipping near 1.5% on the back of poor trade in Spanish banks.
  • Reports continue Wednesday, with Bank of America, BlackRock, Citi and Wells Fargo all due to announce.

COMMODITIES: Gold Looks Through CPI-Induced Volatility

  • WTI and Brent crude futures both traded positively Tuesday, but faltered ahead of the week's highs. Nonetheless, both benchmarks continue to recover off last week's lows, with Brent (U1) key resistance defined at $77.84, Jul 6 high. Key support undercuts initially at $72.11, Jul 8 low.
  • WTI (Q1) key resistance is at $76.98, Jul 6 high and the bull trigger. Initial firm support lies at 70.76, Jul 8 low.
  • Gold saw some short-term volatility on the US CPI release, with prices initially dropping sharply on the stronger-dollar response. The move was short-lived, however, with prices swiftly recovering back up to resume the near-term positive trend.
  • Focus Wednesday turns to the weekly DoE inventory data, with markets expecting another draw of over 4mln bbls for the headline crude numbers.
MNI Chicago Bureau | +1 312-431-0089 | bill.sokolis@marketnews.com
MNI Chicago Bureau | +1 312-431-0089 | bill.sokolis@marketnews.com

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