T-Notes Firm Off Of Lows, Chinese Equities Still Eyed

T-Notes have worked away from lows in Asia-Pac hours, with the gyrations in Chinese equities at the fore once again. Note that state-media took a much more active approach in trying to placate fears re: systemic risks causes by the recent sell off in Chinese equities ahead of the open of Chinese markets. The contract last trades -0-00+ at 134-14+, 0-05 off lows, sticking to a 0-06 range overnight. Cash Tsys have seen some modest twist flattening and print between -/+0.5bp across the curve. There has been some light demand for TY upside exposure via ~4.0K of screen lifts in the TYU1 135.50 calls.

• To recap, the cash curve bull flattened on Tuesday, with the long end richening by ~5.0bp come the close. The space received some tailwinds from the sharp sell-off in the Chinese equity sphere, with softer than expected durable goods data also aiding the bid (although that was accompanied by positive revisions to the previous month). A solid round of 5-Year supply fed into the broader narrative. In terms of pricing, the auction stopped on the screws, with dealer takedown holding just below the recent averages and the cover ratio holding steady. An early NY block buy of UXYU1 futures dominated on the flow side (+6,197), representing an ~$825K DV01 equivalent.
• The latest FOMC monetary policy decision will headline the docket during NY hours. The FOMC will use the July meeting to debate its strategy to taper asset purchases (including timing, pace, and composition). The December FOMC looks like the most likely meeting for a formal announcement. The risks to the July Statement lean hawkish, but the mood could swiftly change with Powell delivering a relatively dovish press conference. Moves in yields since the June FOMC suggest increasing market concerns over the growth outlook, but it's unlikely this will persuade the Fed to change course at this stage.