Weakness Evident In Core FI After Recent Rally

Pockets of selling in fairly recent trade have allowed T-Notes to push to fresh session lows, printing -0-11+ at 133-17 at typing (0-01 off lows) on above average volume of ~145K. Cash Tsys run 1.0-4.0bp cheaper on the day, with bear steepening in play. There hasn't been much in the way of meaningful news flow during Asia-Pac hours. A 5.0K block sale of FVU1 (~$255K DV01 equivalent) helped the space lower not long after the Asia-Pac reopen, providing the most notable round of flow during the overnight session. Thursday's rally in the space has now been unwound, with some pointing to focus on Monday's "double supply" of 3- & 10-Year Notes as a potential catalyst, although others have noted that the recent positioning washouts may have run their course given the overstretched valuations in Tsys vs. their in house models.

• Looking to JGB futures, there hasn't been much in the way of idiosyncratic fundamental news flow to explain the pullback from overnight highs, with the initial overnight correction coming as U.S. Tsys moved back from Thursday's pre-NY richest levels. The contract last trades -20 vs. yesterday's settlement levels, which is 45 ticks off of the overnight peak. This comes after the contract finished overnight trade just a handful of ticks above Tokyo settlement. We have previously identified speculation surrounding CTA-like participation in the most recent legs higher in futures (which broke technical resistance levels), which can exacerbate moves when the trend falters a little. Cash JGB trade sees much of the movement limited to the 7-Year zone, pointing to futures driven moves, as opposed to outright cash JGBs being in the driving seat. 7-Year yields print ~2.5bp higher on the day at typing, shorter maturities run a modestly richer on the session, while longer dated paper is little changed to 1.0bp cheaper. 10-Year JGB yields do not seem willing to test the 0% mark without a fresh fundamental catalyst, this comes after the metric hit a low of 0.02% on Thursday, a level not printed since early January. Weakness in local equity markets may be helping limit the fall in JGBs, with the Nikkei 225 currently the best part of 2% softer on the day. Signs of paying have been seen in long dated swaps, resulting in some swap spread widening in the super-long zone.
• The Aussie bond curve was steeper on the wider dynamic, with YM +0.5 and XM -2.5. Cash trade saw deeper weakness further out the curve, with longer dated paper cheapening by ~5.5bp. Local news flow saw deeper COVID lockdown restrictions imposed in Sydney, while Australian Prime Minister Morrison detailed much wider Pfizer COVID vaccine access from the middle of July (which will see the weekly availability hit 1mn doses vs. the current 300-350K.)