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Yields Ebb in Lead-Up to FOMC

US TSYS SUMMARY
Tsys rallied Tuesday, weaker equities triggered by China stocks overnight (Shanghai Comp down 2.5% at 3,381.18 CSI 300 down 3.5% at 4,751.31) provided an early tail wind on an otherwise muted, pre-FOMC session.
  • Yield curves were broadly flatter w/30Y bonds holding early session highs after big miss on Durables (+0.8% vs. +2.1% exp -- softened somewhat by upward revision for prior: +3.2% vs. 2.3%). Trading desks reported carry-over buying in 2s-5s, two-way in 10s and more recently in 30s.
  • Tsy futures held near session highs after $61B 5Y note (91282CCP4) auction tailed slightly: .01bp: high yield of 0.710% vs. 0.709% WI. Bid-to-cover 2.36x just over 5 month average of 2.35x. Indirect take-up climbed to 58.07% vs. 57.62% in June (59.01% 5M avg); direct bidder take-up slipped to 17.75% vs. 18.09% last month (5M avg of 16.29%); primary dealer take-up: 24.18% was still shy of the 5-month average of 24.70%. The next 5Y auction is tentatively scheduled for August 25.
  • Focus turns to Wed's FOMC policy annc, no change in rate expected but many sell-side analysts anticipate more discussion regarding tapering.
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