Steeper Again

A fairly flat re-open, with TYM2 around late NY levels, -0-05 at 120-20+.

• To recap, the steepening impulse observed on Tuesday spilled over into Wednesday dealing, with the major cash Tsy benchmarks running flat to 6bp richer, as 2s led the rally. When it came to flows, sizable block buys of TUM2 (+25,000 & +47,330) fed into the profit taking on flatteners/short front-end Tsy positions narrative that many have pointed to as a driver of price action week-to-date.
• Thematically, the short-term spill over from slightly softer than expected core CPI continued to support the shorter end of the curve, even while the burden of supply meant that the long end underperformed (although the curve moved way from steeps as we worked through NY dealing).
• While ~95bp of tightening is still priced into dated OIS covering the next two Fed meetings, cumulative tightening priced for the reminder of ’22 flirted with the 2.00% level for a brief period of time on Wednesday, after briefly showing above 2.25% on a couple of occasions in recent weeks. The market remains of the view that the Fed is set to tighten expeditiously, however, the velocity of the recent hawkish repricing and calendar-based limitations surrounding Fed tightening may be providing some support in the wake of the mild disappointment observed in the aforementioned core CPI prints, even though the path to “normal” inflation levels is likely to be much more elongated than many envisaged back in the “transitory” heights of ‘21.
• Firmer than expected PPI data had no lasting impact on the space, with Tsys richening to fresh session highs during the NY morning after a brief blip lower in the wake of the data, before backing off later in the day.
• In terms of auction specifics, 30-Year supply tailed by 0.9bp, with the cover ratio slipping back in line with the recent average, while dealer takedown nudged higher, but remained below its own 6-auction average.
• Headlines were dominated by the continued adjustment of focus of the Russian military towards Eastern Ukraine, while Fed Governor Waller stressed that the U.S. economy will be able to absorb aggressive Fed action, reiterating a preference for front-loaded tightening, while suggesting the peak in inflation is in the rear-view.
• Australian labour market data headlines the docket during Asia-Pac hours, with U.S. retail sales, weekly jobless claims, the prelim UoM survey and Fedspeak from Williams, Mester & Harker due during Thursday’s holiday-shortened NY session (cash markets will close at 14:00 Eastern).