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Treasuries Rally On Confluence Of Dovish Factors, Heightened Growth Sensitivity

US TSYS
  • Treasuries have seen a particularly swift rally following the backdrop of a confluence of dovish factors as listed above.
  • Specifically to the US, this softer global growth backdrop lends support to yesterday’s Dudley comments which continue to see some airtime.
  • He viewed waiting to cut in September as unnecessarily risking recession and whilst July pricing still sees very low odds of a cut (2.5bp), cut expectations gather pace more generally now 30bp of cumulative cuts for Sept and 71bp for Dec.
  • The longer end meanwhile sees a sizeable paring of yesterday’s second half losses, which had been exacerbated by a 1.1bp tail in the 5Y auction – a disappointment after historically strong demand for Tuesday’s 2Y – along with the rise in yields seeing Treasury accept no offers in the buyback operation.
  • The front end leads the rally with 2Y and 3Y yields down ~7.5bps vs 5.3bps for 10bps.
  • It sees new YTD steeps in various curves, with 2s10s at -12bps and 5s30s at 42bps.
  • TYU4 has recently touched a session high of 111-02 (+12+) and with very strong volumes for the time of day at 370k.
  • The overnight low of 110-19+ came close to latest lows at 110-18+ (Jul 22 low) in moves that have cleared the 20-day EMA, opening 110-09 (50-day EMA). As above though it remains within yesterday’s 111-04+ whilst resistance isn’t seen until 111-13+ (Jul 16 high).
  • Looking ahead, this backdrop could see particular sensitivity to any sign of weakness in advance Q2 GDP/PCE inflation and durable goods or initial jobless claims not showing much reversal of last week’s potential Hurricane Beryl distortion.

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