Rally Extends, Fedspeak Helps Cap Gains

TYH3 deals at 114-15, -0-05, little changed from levels seen late in the NY session.

• Cash Tsys finished Monday 2-4bp richer across the major benchmarks, with 2s leading the bid.
• Tsys rallied late in the London session, unwinding modest cheapening as a bounce in German FI spilled over and NY Fed survey showed a decline in short term inflation and household spending expectations.
• Tsys had steadied in early NY dealing after cheapening a touch during in the London morning, aided by the combination of a softer USD and firmer U.S. equities
• Fedpseak from SF President Daly and Atlanta President Bostic helped cap gains; as Tsys came off session highs, the USD chipped away at losses and the S&P pared gains. Daly noted she expects to raise rates somewhere over 5%, however stressed it's too early to "declare victory" over persistent inflation. Bostic said policymakers should hike above 5% then go on hold for "a long time".
• Several block sales in TU futures headlined during the latter rounds of NY dealing, while an FV/WN steepener was also seen earlier in the day.
• Fed dated OIS was stable to a touch lower yesterday, with a marginal tick lower in the tightening expected at the Feb '23 meeting (now at ~31bps). The terminal rate remains a touch below 5%.
• Tokyo CPI headlines an otherwise thin Asia-Pac docket. Further out we have U.S. wholesale inventories, however, today's highlight will be Fedspeak from Chair Powell. On the supply side, we will see the latest 3-Year Tsy auction.