US TSYS DRIFT LOWER AMID FED CHR YELLEN, MIXED 2Y AUCTION

     US TSYS SUMMARY: Treasuries end Tuesday weaker after a mixed $26B 2Y

auction, which occurred shortly after Fed Chr Yellen spoke. Yellen said

inflation uncertainties call for gradual rate moves but hiking too slowly risks

overheated labor mkt; also she said the mkt shd expect inflation overshoot with

symmetric tgt (2% not ceiling.) 

- The 2Y auction drew a 1.463% rate, moderate/low 44.15% indirects, but very

strong 19.04% directs (most since 20.1% Feb. 2017). 

- Tsys opened mildly lower on light volume, long end on/off bid ahead open. Minn

Fed Kashkari said late Mon that hiking rates as inflation remains weak a

mistake. 

- Little react to data, Redbook Sep store sales unchanged vs. Aug, Case-Shiller

home price index +0.3 M/M. MBS tightened earlier. TIPS underperformed. 

- Stronger US$ vs. Yen spurred FX-acct selling in Tsys, corporate and auction

concession, duration selling in morning. And modest two-way flow with better

selling midmorning. 

- US swaps end mostly tighter, light swap-tied paying short end, spd flatteners,

steepeners out the curve. 

- Tsys 3pm ET: 2Y 1.440%, 3Y 1.570%, 5Y 1.852%, 7Y 2.071%, 10Y 2.230%, 30Y

2.772%

     US TSY FUTURES CLOSE: Tsys hold weaker levels by the bell/after mixed $26B

2Y note auction that drew 1.463% rate and moderate/low 44.15% indirects Tuesday.

Equities steady, Gold off sharply (-12.92, 1297.92). Stronger US$ vs. Yen

(112.170) spurred FX-acct selling, corporate and auction concession, duration

selling in first half. Otherwise modest two-way flow with better selling around

midmorning, Current futures levels: 

* Dec Ultra bonds down 11/32 at 167-21 (167-04L/168-06H) 

* Dec 30-yr Bond futures down 4/32 at 154-25 (154-11L/155-03H) 

* Dec 10-yr futures down 2/32 at 126-00 (125-26.5L/126-04H) 

* Dec 5-yr futures down 1.5/32 at 117-26.25 (117-22.75L/117-28.75H) 

* Dec 2-yr futures down 1.25/32 at 107-28.75 (107-28L/107-30H)

US EURODLR FUTURES CLOSE: Mildly lower across the strip, off first half lows on

surprisingly decent volume (Red Dec'18 leads w/over 310k). Dec rate hike

probability back up to 66.0 vs. 61.6% late Monday. Current White pack

(Dec'17-Sep'18): 

* Dec'17 -0.010 at 98.505 

* Mar'18 -0.010 at 98.400 

* Jun'18 -0.020 at 98.310 

* Sep'18 -0.020 at 98.250 

* Red pack (Dec'18-Sep'19) -0.020-0.015 

* Green pack (Dec'19-Sep'20) -0.020-0.015 

* Blue pack (Dec'20-Sep'21) -0.015 

* Gold pack (Dec'21-Sep'22) -0.015-0.010

US SWAPS: Spds mostly tighter all session, spd curve flatter w/2yr on wides

late. Second half flow includes 2-way in 5s w/prop acct rate receiving on light

size at 1.94249% ($150M nominal, $71.4k DV01) vs. dealer 5s10s spd curve

flattener. Earlier flow included auction concessions and duration selling. Aside

from 2Y note auction, swappable corp and supra-sovereign supply picking up

(Saudi 3-part Wed). OTC vol steady mixed, gamma softer on light volume. Latest

spread levels: 

* 2Y +1.12/26.69 

* 5Y -0.25/8.25 

* 10Y -0.31/-3.81 

* 30Y -0.62/-32.31

OUTLOOK: *** Data/speaker calendar (prior, estimate):

- Sep 27 22-Sep MBA Mortgage Applications (-9.7%, --) 0700ET

- Sep 27 Aug durable goods new orders (-6.8%, +0.8%) 0830ET

- Sep 27 Aug durable new orders ex transport (0.6%, +0.3) 0830ET

- Sep 27 MinFed Kashkari Welcome Tribal Comm Higher Ed, Minn 0915ET

- Sep 27 Aug bldg permits revision 1000ET

- Sep 27 Aug NAR pending home sales index (109.1, --) 1000ET

- Sep 27 22-Sep crude oil stocks ex. SPR w/w (+4.59M bbl, --) 1030ET

- Sep 27 NY Fed VP Potter participates Forex Network panel, Chi. Q/A, 1030ET

- Sep 27 US Tsy $13.0B 2-Year FRN reopening auction 1130ET

- Sep 27 US Tsy $34.0B 5-Year Notes auction 1300ET

- Sep 27 StL Fed Bullard:Eco/mon pol:TrumanSt Univ Kirksville MO Q/A 1330ET

- Sep 27 Fed Gov Brainard Bkg & Econ/Minority Bkrs Forum; KC Mo Q/A 1400ET

- Sep 27 Boston Fed Rosengren speaks NYU Money Marketeers NY Q/A 1900ET

Eurodollar/Treasury option summary

     Eurodollar options,

Pit/screen:

+35k EDF 82p, 1.0 vs. 98.41/0.0%

30k EDH 81/82 2x1p spds vs. EDF 82p, 0.25 net

-20k EDZ 86c, 1.5 vs. 98.515

+10k EDM 85/86 1x2c spds, 0.0, add to +40k Mon

+8k EDU 73/77/80p flys, 2.5

+5k EDU 76/77/80p trees, 2.5

5k EDH 82/83 2x1p spds, 1.5

--------------------

-25k EOZ 78/81/82p flys, 1.0

+20k EOH/E2H 83c spds, 0.0 steepener

+15k EOH 86/87/88p trees, 0.0

-10k EOH 80/81p spds, 5.0 vs. 98.145/0.15%

+10k EOX 83c, 1.5

7k EOX 78/80/81/82p condors, 6.0

Put spd strip, 15.5 total db

+5k EOH 76/78 1x2p spds, 7.0 w/

+5k EOZ 80/81p spds, 3.5 w/

+5k EDU 80p, 5.0, 15.5 package

+3.2k EOH 73/76/77/78p condors, 1.5

-------------------

-10k E2Z 80/82 2x1p spds, 5.5

-10k E2Z 77/E4Z 72p spds, 1.5/flattener

10k E2Z 75/77p spds, 2.5 vs. 97.995

6k E2Z 77/78p spds, 3.0

+6k E2M 81/83 1x2c spsd, 0.5

     Tsy options

Pit/screen:

+2k TYX 127+/128+ 1x2c spds, 1

2k TYZ 126 straddles, 136-138.5

+1.9k TYX/TYZ 124+/128+ combo, 3/Dec ovr

---------------------

+18k FVZ 114p, 1

---------------------

+2k USZ 150p, 25 vs. 154-12/0.14%

--MNI New York Bureau; tel: +1 212-669-6432; email: sheila.mullan@marketnews.com

[TOPICS: MTABLE,MNUEQ$,M$U$$$,MR$$$$,M$$FI$,MN$FI$]