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Tnotes/Bund spread widening


(Z1) Gains Considered Corrective


(Z1) Bearish Outlook Intact


Massive selling hit Govies

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  • MNI: Fed's George Says 'Substantial Progress' Already Made
  • Dallas Fed Kaplan on CNBC (uber-hawk but non-voter) likes annc plan to taper at Sep FOMC, begin in October.
  • MNI BRIEF: US Budget Deficit Narrows to USD2.54T Through July


FED: It's time for the Federal Reserve to begin dialing back its QE program because the U.S. economy has already achieved "substantial further progress" toward goals of full employment and price stability, Kansas City Fed President Esther George said Wednesday.

  • "The expectation of continued strong demand, a recovering labor market, and firm inflation expectations are consistent, in my view, with the Committee's guidance regarding substantial further progress toward its objectives," she said in prepared remarks to a National Association of Business Economics conference. "I support bringing asset purchases to an end under these conditions."
  • George joins a number of colleagues who have called for the Fed to soon announce the start of a reduction in the central bank's USD120 billion monthly purchases of Treasuries and mortgages. MNI reported this week the Fed is likely to offer advance warning at its September meeting that a taper is coming later in the year.
US: The U.S. rang up a USD2.54 trillion budget deficit in the first ten months of the fiscal year, smaller than the previous period last year even with a record USD302 billion shortfall in July, the Treasury Department reported Wednesday.
  • The Treasury said the federal deficit in the first ten months of fiscal year 2021 was down USD267 billion compared with the deficit during the same period last year. Year-to-date revenue climbed 18% while spending gained 4%. The U.S. ended fiscal year 2020 with a deficit around USD3.1 trillion.


MNI: US JUL CPI 0.5%, CORE 0.3%; CPI Y/Y 5.4%, CORE Y/Y 4.3%

Core M/M misses to the downside, much closer to 0.3% vs 0.4% expected - headline in line on rounded (0.5%) but below rather than above the 0.5% mark unrounded:

  • Unrounded % M/M figures: Headline 0.474; Core: 0.329
  • Unrounded % Y/Y figures: Headline 5.365; Core: 4.275


Key late session market levels:
  • DJIA up 198.68 points (0.56%) at 35460.04
  • S&P E-Mini Future up 7.5 points (0.17%) at 4437.25
  • Nasdaq down 34.2 points (-0.2%) at 14752.5
  • US 10-Yr yield is down 1.5 bps at 1.3337%
  • US Sep 10Y are up 2/32 at 133-19.5
  • EURUSD up 0.002 (0.17%) at 1.174
  • USDJPY down 0.13 (-0.12%) at 110.44
  • WTI Crude Oil (front-month) up $0.98 (1.44%) at $69.26
  • Gold is up $22.72 (1.31%) at $1751.97
European bourses closing levels:
  • EuroStoxx 50 up 18.51 points (0.44%) at 4206.33
  • FTSE 100 up 59.1 points (0.83%) at 7220.14
  • German DAX up 55.38 points (0.35%) at 15826.09
  • French CAC 40 up 37.78 points (0.55%) at 6857.99

US TSY SUMMARY: Core CPI Miss Spurred Early Vol

Data-driven real-vol evaporated quickly early Wednesday, Tsys holding weaker levels on narrow range until an exceptionally strong 10Y Note auction stopped out just over 3bp spurred a sharp gap bid. Levels scaled back some post auction support to marginally mixed after the close.
  • Tsy futures surged after CPI Core miss (0.3% vs. 0.4% est), but just as quickly reverse (CPI MoM in-line with forecasted 0.5%) -- trading back near late overnight session lows. Volume surged on two-way flow, TYU >515k, yield curves bear steepened early.
  • Tsys reversed losses/surged higher after particularly strong 10Y Note auction stopped through just over 3.0bp through WI at auction cutoff with 1.340% high yield. Tsy 10Y yields fell to session low of 1.3000% before late session bounce to 1.3202%. 2.65x bid-to-cover well above five auction avg: 2.43x while indirect take-up surged to 77.25% vs. 61.16% 5M avg.
  • Fed speak was decidedly hawkish: Fed's George says 'Substantial Progress' already made; Dallas Fed Kaplan on CNBC (uber-hawk but non-voter) likes annc plan to taper at Sep FOMC, begin in October.
  • The 2-Yr yield is down 2bps at 0.2186%, 5-Yr is down 1.4bps at 0.8115%, 10-Yr is down 0.9bps at 1.3405%, and 30-Yr is up 0.6bps at 2.0048%.


  • 3M10Y -0.936, 128.386 (L: 124.93 / H: 131.769)
  • 2Y10Y +0.788, 111.653 (L: 108.343 / H: 113.313)
  • 2Y30Y +2.508, 178.355 (L: 174.765 / H: 179.827)
  • 5Y30Y +2.136, 119.261 (L: 115.769 / H: 120.624)
  • Current futures levels:
  • Sep 2Y up 1/32 at 110-8.125 (L: 110-06.25 / H: 110-08.5)
  • Sep 5Y up 2.25/32 at 123-28.5 (L: 123-22 / H: 124-00.75)
  • Sep 10Y up 1.5/32 at 133-19 (L: 133-09.5 / H: 133-29)
  • Sep 30Y down 7/32 at 163-0 (L: 162-17 / H: 163-26)
  • Sep Ultra 30Y down 25/32 at 195-20 (L: 195-01 / H: 197-01)


  • Sep 21 steady at 99.870
  • Dec 21 +0.005 at 99.820
  • Mar 22 +0.010 at 99.845
  • Jun 22 +0.015 at 99.795
  • Red Pack (Sep 22-Jun 23) +0.025 to +0.035
  • Green Pack (Sep 23-Jun 24) +0.025 to +0.035
  • Blue Pack (Sep 24-Jun 25) steady to +0.015
  • Gold Pack (Sep 25-Jun 26) -0.01 to steady


US DOLLAR LIBOR: Latest Settles

  • O/N +0.00000 at 0.07863% (+0.00012/wk)
  • 1 Month +0.00013 to 0.09663% (+0.00138/wk)
  • 3 Month -0.00150 to 0.12125% (-0.00713/wk) ** (Record Low: 0.11800% on 6/14)
  • 6 Month +0.00113 to 0.15738% (+0.00688/wk)
  • 1 Year +0.00325 to 0.24288% (+0.00550/wk)
STIR: FRBNY EFFR for prior session:
  • Daily Effective Fed Funds Rate: 0.10% volume: $69B
  • Daily Overnight Bank Funding Rate: 0.08% volume: $251B
US TSYS: Repo Reference Rates
  • Secured Overnight Financing Rate (SOFR): 0.05%, $865B
  • Broad General Collateral Rate (BGCR): 0.05%, $363B
  • Tri-Party General Collateral Rate (TGCR): 0.05%, $345B
  • (rate, volume levels reflect prior session)
FED: NY Fed Operational Purchase
  • Tsy 22.5Y-30Y, $2.001B accepted vs. $5.200B submission
  • Next scheduled purchase
  • Thu 8/12 1010-1030ET: TIPS 1Y-7.5Y, appr $2.025B
  • Thu 8/12 1500ET Update NY Fed Operational Purchase Schedule

FED: Reverse Repo Operations, Over $1T Again, But No New High - Yet

NY Fed reverse repo usage climbs to $1,000.460B from 70 counterparties vs. $998.654B on Tuesday. Compares to record high of $1,039.394B on Friday, July 30.

PIPELINE: Issuance Slows After $35B Issued Mon-Tue

$4.7B expected to price Wednesday:
  • Date $MM Issuer (Priced *, Launch #)
  • 08/11 $1B #Air Lease Corp $500M 3Y +60, $500M 7Y +125
  • 08/11 $1B Royal Caribbean 5NC 5.5%a
  • 08/11 $1B #Equifax 10Y +105
  • 08/11 $800M #Public Service Co Oklahoma $400M 10Y +90, $400M 30Y +115
  • 08/11 $500M #Ventas Realty 10Y +120
  • 08/11 $400M *Sichuan Development 5Y 2.8%

EGBs-GILTS CASH CLOSE: Gilts Bull Steepen

Core European FI had a constructive session, reversing morning losses in the afternoon on a weaker-than-expected US core inflation print.

  • Gilts outperformed, with the UK short end rallying sharply (2Y -3bp in a bull steepening move).
  • Peripheries couldn't keep pace, with Italian spreads widening and underperforming peers.
  • Very little in the way of market-moving data (CPI finals). UK sold GBP0.7bln of linkers, German E4bln of Bund.
  • Bond supply is done for the week, and there are no scheduled central bank speakers. Thursday's highlight is set to be UK GDP, first thing.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

  • Germany: The 2-Yr yield is unchanged at -0.748%, 5-Yr is down 0.5bps at -0.728%, 10-Yr is down 0.7bps at -0.464%, and 30-Yr is up 0.1bps at -0.009%.
  • UK: The 2-Yr yield is down 3bps at 0.123%, 5-Yr is down 2.2bps at 0.274%, 10-Yr is down 1.8bps at 0.571%, and 30-Yr is down 0.8bps at 0.946%.
  • Italian BTP spread up 2.5bps at 103.1bps / Spanish up 1.5bps at 70.1bps

FOREX: US Core CPI Miss Halts Greenback Momentum

  • A small miss in monthly U.S. Core CPI weighed on the greenback on Wednesday. The dollar index looks set to end a three-day winning streak, after briefly matching the July highs at 93.19.
  • EURUSD fell just two pips shy of key 1.1704 support before the data and ends the day a quarter of a percent higher around 1.1750. While less than 50 pips away, this level marks an important support and potential inflection point, bolstered by 1.1685 just below, which represents the 38.2% Fibonacci for the 2020 - 2021 rally. Importantly, little resistance is seen until the 1.19 highs, matching closely with the 50-day EMA at 1.1899.
  • Overall dollar weakness aided gains across the entire G10 space with notable gains for AUD and NZD, rising 0.4% and 0.6% respectively, following a second consecutive day of gains for broad commodity indices. For NZDUSD, multiple highs between 0.7090-7105 will prove the next resistance.
  • The Norwegian Krone outperformed, rising 0.72% against the dollar, bolstered by a strong rebound in oil prices following the DOE inventories data.
  • A strong US 10-yr auction precipitated some additional marginal dollar weakness, however G10 ranges overall remain unimpressive. The following sessions may be significant in determining the medium-term direction in which we will see PPI, jobless claims and sentiment data. Next week, retail sales and the FOMC minutes will be released.
  • Thursday will see the UK report their preliminary Q2 GDP data at 0700BST.