Wild Tuesday

TYM2 nudges higher at the re-open, but is well within the confines of Tuesday’s range, dealing unchanged at 120-16.

• To recap, the curve bull steepened on Tuesday, with 3s providing the firmest point, richening by ~1bp, while 30s were virtually unchanged come the bell. The front end-driven bid was facilitated by a slightly softer than expected round of core CPI data, leading to some questioning the immediate staying power of the latest burst higher in inflation (although supply bottlenecks surrounding the Russia-Ukraine conflict and China’s COVID policy continue to present clear upside risks). Tsys were already off of cheaps ahead of the data.
• The rally meant that 10-Year supply tailed by 3bp, the widest such tail observed since ’11. Primary dealer takedown ticked up to the highest level observed since July, while the cover ratio was little changed, a shade below its recent average. The wide tail facilitated further curve steepening, although the likes of the 2-/10-Year & 5-/30-Year curves pulled back from session steeps into the bell, with Tsys off worst levels of the day.
• Comments from Fed’s Brainard added support ahead of the auction, as she pointed to a “notable” core inflation slowdown in the March data, although flagged upside risks surrounding the Russia-Ukraine conflict. She also flagged already tighter financial conditions, although zooming out, U.S. FCI metrics remain at loose levels in a historical sense (Brainard also highlighted that neutral rates may continue to operate at low levels in historical terms).
• Still, there wasn’t much in the way of impact on Fed pricing for ’22, with a near 95bp of tightening priced into the OIS strip over the next two FOMC meetings, little changed vs. Monday, while there is a cumulative 215bp of tightening priced over the remainder of ’22, ~5bp shy of what was priced at Monday’s close.
• Flow was dominated by a sizable steepener package across TU/US/WN futures (+41,733/-3,000/-3,189)., similar to a package observed on Monday
• Fedspeak from Richmond Fed President Barkin (’24 voter) will cross during Asia-Pac hours, with the latest RBNZ monetary policy decision also due. Looking ahead, Wednesday’s NY session will bring the release of PPI data for March, 30-Year Tsy supply and Fedspeak from Governor Waller. The latest BoC monetary policy decision will also provide some interest.