US TSYS GAIN ON YELLEN CALM;NOW SNOOZE UNTIL 3PM ET ECB DRAGHI

     US TSYS SUMMARY: UPDATE: Treasuries gained amid relief buying as Fed Chair

Yellen stuck to regulatory type topics, and did not address US current econ or

mon policy.

US TSYS SUMMARY: US Treasuries open NY mildly weaker after overnight

consolidation, drift lower since about 2am ET; all await 10am ET Fed Chr Yellen

and 3pm ET ECB head Draghi speeches. Note UK has a bank holiday next Monday. US

Tsy will squeeze in both 2Y, 5Y auctions on Monday along with normal bill

auctions, then do 7Y auction Tuesday. 

- TOKYO: Asian regional banks and credit funds bought Tsys. Asian stocks indexes

marched higher: Japan's Nikkei up 0.51%, HKG's Hang Seng returned after one-day

halt Thursday due to taiphoon, up 1.20%, China CSI-300 up 1.64%. 

- LONDON: Tsys and EGBs ebbed early on. But mkt then drew credit-tied buyers in

5Ys, while end users and bank porfolios bought 10Y notes. Fast money sold 5Y,

10Y. EGB highlight was a 14,235 sale of German Bobls. 

- US SWAPS: Mildly wider mainly, macro fund paying 2/10Y, receiving 10/30Ys

earlier. UK saw 3Y/5Y curve flattener in $160M/vs. $100M, and 5Y payer outright

for EU100M at 8:39 am BST (3:39am ET.); also $130M TY 10Y invoice spread roll

from Sec to Dec at 9:06am BST (4:06am ET.) 

- EURODLR FUTURES; Mildly weaker. 

- US HIGH-GRADE CORPORATE BOND ISSUANCE: Nothing firmly scheduled, but pipeline

building and syndicates expect busy September issuance.

EGB SUMMARY: The much-awaited Yellen speech was a big disappointment for the

market, as it did not address monetary policy. Treasuries, Bunds etc rallied

strongly in the aftermath of the speech because when waiting for a balance sheet

shrinkage, no news is good news, at least for bulls. 

- Prior to Yellen, EGBs had been on the back-foot, not because of any specific

news but mostly down to flows. BTPs also performed strongly as the market

started to price in the decent redemption/coupon flows. For a good chunk of the

trading session, Spanish debt was underperforming Germany at the same time as

the Italian 10Y was compressing it spread. 

- Just before lunch, there was a 14k seller of the German Obl contract that

dragged the entire yield surface higher at least temporarily. Swap flows we

observed suggested that the trade was done against swaps. Indeed, German debt

underperformed libor and OIS swap curves over the course of the day. 

- By close of play, the 10Y Bund yield was 1bp higher at 0.385%, with a 0.5bp

steepening of 10-30Y Germany worthy of mention.

- The Editorial Network Germany (RND) report that the ECB will discuss an exit

to QE in September, and embark on an exit at their October 26 meeting. The

article cites "ECB circles" which was translated on newswires as "central bank

officials". They note that the withdrawal will be slow and gradual. Several

strategists told MNI this is an expected and likely timetable.

GILT SUMMARY: Gilts also gained on Fed Chair Yellen. Earlier UK Gilts drifted

lower in light illiquid trade, weighed by heavy selling in German 5-year

futures, but overall marketswe are seen side-lined ahead of key comments from

Fed Chair Yellen at Jackson Hole. 

- Gilts opened little changed with little direction seen overnight in Asia to

direct markets which had one eye on the opening of Jackson Hole Symposium.

However slipped lower in light volume as 2 of 3 German IFO numbers ticked higher

and then large selling in Bobl and Bund futures saw Gilts hit low. 

- Latest Citi/YouGov inflation expectations were released showing a tick higher

in both year-ahead (2.6% vs 2.5%) and 5-10-year ahead CPI (3.2% vs 3.1%),

however, this had very little impact on the Gilts curve.

- Sterling has rallied against both the US Dollar and the Euro so far this

morning, while the UK's FTSE 100 index has squeezed higher by around 0.35%. 

- UK breakevens are not doing too much either with spreads around 0.5bp wider,

while there has been little movement in swap spreads.

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

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