The R Word

TYU2 opens around late NY levels, last dealing -0-01 at 116-29+.

• To recap, the cash Tsy curve bull steepened on Wednesday, with the major benchmarks richening by 9-15bp come the bell.
• Weaker equities, a pull lower in crude prices and a marginally softer than expected core CPI print out of the UK seemed to provide support for the space ahead of NY dealing, although crude finished off lows and equities managed to recover from lows to lodge modest losses on the day.
• Fed rate hike premium was pulled out of the STIR space (OIS now looks for a year end Fed Funds rate of ~3.50%, per BBG WIRP, down from the ~3.60% seen on Tuesday), while recession worry became more evident (evidenced by the EDZ2/H3 spread moving into inverted territory for the first time in this cycle, while the EDZ2/Z3 spread registered fresh cycle lows).
• Chair Powell stressed the meeting-by-meeting nature of Fed decisions: "we anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy." Note that Powell failed to take the idea of a 100bp rate hike off the table when questioned on the matter Iif the data deems such a move appropriate).
• 20-Year Tsy supply was well received despite the richening, generating a modest 0.2bp tail, while the cover ratio nudged above the recent average observed at 20-Year auctions as dealer takedown ticked incrementally lower (below its own recent average).
• Looking ahead, Asia-Pac hours do not present much in the way of notable calendar risk, while European flash PMI data will be observed ahead of NY dealing. Thursday’s NY session will bring the release of weekly jobless claims data, flash U.S. PMI readings and the Kansas City Fed manufacturing print. We will also get day 2 of Fed Chair Powell’s testimony on the Hill.