Tight In Asia Ahead Of FOMC, Pozsar Funding Musings Draw Attention

T-Notes were once again confined to a tight 0-03+ range in Asia-Pac hours, with the contract last +0-01+ at 139-17+, while cash yields sit unchanged to 1.0bp richer across the curve, with light bull flattening in play. U.S. President Trump continued to push his bullish views on the COVID-19 vaccine front, but there was little in the way of meaningful tier 1 news flow overnight.

• Tuesday saw the space hold a tight range with the curve going out modestly steeper as yields cheapened at the margins come the bell. Volume was light ahead of Wednesday's FOMC decision (see our full preview for further colour on that matter), although IG $ issuance helped on that front, providing hedging related flow. 20-Year Tsy supply stopped through WI by 0.5bp, as the cover ratio edged up, moving back towards the average, while direct participation firmed. This allowed the space to correct from lows, with a pullback from best levels for equity markets also helping.
• EDZ0 witnessed some outperformance on the strip overnight, with the contract last +1.0 on solid volume (> 35K). This is being tied to a note from influential funding market watcher Zoltan Pozsar of Credit Suisse, who has suggested that "with the Fed's standing repo and FX swap facilities, any funding pressure coming from balance sheet constraints will be capped at IOR + 5bps and OIS + 25 bps, respectively, for what will likely be a muted year-end turn in funding markets." Pozsar had previously warned of the potential for "a year-end turn much worse than what's currently being priced by the market - unless U.S. banks with lower G-SIB scores or foreign banks pick up the slack." His change of tact comes in the wake of comments made by the J.P.Morgan CFO at a Barclays conference, which revealed that the bank will run at a 4.0% G-SIB surcharge at year-end, up from 3.5% last year, avoiding a bigger jump. Pozsar noted that "this bit of information suggests that funding market volatility at year-end will be low, as the bottlenecks that usually drive such volatility - G-SIB score inflation and banks' efforts to counter them by shrinking their market making activities - won't be present in the FX swap market and bank funding markets this year."
• The latest FOMC decision headlines on Wednesday (see our preview for further colour). Elsewhere, retail sales and TIC flows will provide points of interest.