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Bullish Engulfing Reversal Still In Play

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Will The CHF Strength Drag Down Swiss CPI?

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Short-Term Outlook Remains Bullish

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TYZ1 trades -0-02 at 130-04, shy of the peak of its 0-06 Asia range, while cash Tsys firmed by 0.5-2.5bp across the curve, bull flattening in the process. The move represented a pullback from the late NY lows. TY volume has been decent enough, topping 150K ahead of European dealing.

  • Asia hours saw NY Fed President Williams stress that long-term inflation expectations are "in line with 2%." The previously outlined repayment of a missed coupon on a US$ bond issued by China Evergrande within the 30-day grace period provided some very modest & brief pressure for Tsys, although markets quickly switched focus to a similar missed payment that needs to be fulfilled late next week. Sino-U.S. tensions surrounding Taiwan and some worry re: Intel margin guidance were also noted.
  • To recap, weakness in the front end/belly led yields higher on Thursday, with bear flattening observed. 3s cheapened by ~8bp on the day, while 30-Year yields were ~1.5bp higher. From a technical perspective, 10-Year yields finished just shy of their May 13 high (1.704%). Corporate supply (headlined by an AerCap $21bn 9-parter) was a particular source of weight for the belly of the curve, with freshly embedded rate hike premium, evidenced in Eurodollar futures, also weighing. 5-Year TIPS supply saw very strong demand, with BMO noting that "the strong demand for TIPS served to reinforce the notion that investors are fully engaged in seeking inflation protection. It's tempting to suggest the 2.4 bp stop-through for the 5-year TIPS auction is an 'at any price' event in terms of paying up to offset the risk of inflation - to a large extent this is the case. There is a strong case to be made that the market is getting ahead of itself until there is greater clarity on the supply chain fallout; but that hasn't been an inhibition to press real yields lower." 5-Year breakevens hit all-time wides on Thursday, adding to the broader pressure on Tsys.
  • Flash PMIs from Europe & the UK will headline ahead of Friday's NY session. Elsewhere, we will hear from Fed's Powell & Daly ahead of the Fed's pre-meeting blackout period.