EGB OPTIONS: Bund put spread

The combination of yesterday’s weakness in SOFR futures and preliminary open interest data points to net short setting across much of the SOFR futures strip, with only limited pockets of net long cover seen through the blues.

• This came as the Q1 ECI data triggered the latest round of hawkish Fed repricing, leaving ~28bp of ’24 cuts priced into FOMC-dated OIS ahead of today’s decision,. That represents the shallowest path of cuts priced into ’24 during the current cycle
• Looking ahead to today’s FOMC decision and press conference, Chair Powell is expected to tilt more cautious on the inflation outlook than in previous appearances, with potential flashpoints for markets including whether he acknowledges that 3 cuts are less likely to be the base case for the FOMC in 2024, and/or whether June is too early for the first cut.

* US Data/Speaker Calendar (prior, estimate)

* May-1 0700 MBA Mortgage Applications (-2.7%, --)

* May-1 0815 ADP Employment Change (184k, 180k)

* May-1 0830 US Tsy Quarterly Refunding Annc

* May-1 0945 S&P Global US Mfg PMI final (49.9, 49.9)

* May-1 1000 JOLTS Job Openings (8.756M, 8.690M)

* May-1 1000 Construction Spending MoM (-0.3%, 0.3%)

* May-1 1000 ISM Manufacturing (50.3, 50.0)

* May-1 1000 ISM Prices Paid (55.8, 55.4)

* May-1 1000 ISM New Orders (51.4, 51.0)

* May-1 1000 ISM Employment (47.4, 48.2)

* May-1 1130 US Tsy 17W Bill auction

* May-1 1400 FOMC Rate annc.

* May-1 1430 Fed Chairman Powell press conference

Today's expected buyback announcement should provide final details how the program will work, and a schedule for the upcoming quarter (if applicable). Here, we recap expectations based on previous Treasury communications and analyst notes:

• Objectives: There are two key goals from buybacks: cash management and liquidity support. The cash management operations are designed to smooth out cash holdings around major tax dates, while liquidity support ops will be used to build liquidity across the yield curve by buying back selected off-the-run securities from market participants.
• Schedule: Treasury plans to conduct operations in 9 buckets across-the-curve for nominal coupon and TIPS securities - see table below. Liquidity support operations are planned for each bucket once or twice per quarter, around 1 operation weekly. For cash management operations, regular operations are envisaged though will likely occur predominantly just before major tax payment dates.
• Sizes: For liquidity ops: Maximum $30B / quarter, with $4B max per nominal bucket per quarter, and $1B per TIPS bucket per quarter, though there could be modest adjustments made in future. For cash management: Maximum of $120B / year.
• Expectations for today: There is a wide range of expectations for what Treasury will actually announce for the upcoming quarter.
• Some analysts expect cash management buybacks may be initiated quickly given the high TGA cash balance on hand, but the guidance suggests that such buybacks will occur around major tax dates (ie June if not September), and others believe that current market conditions don’t make large liquidity buybacks urgent.
• General expectations are for larger liquidity buyback sizes to be set for shorter-dated instruments (up to the $4B max) with one op per quarter, and smaller but more frequent operations (2x per quarter) for longer-dated instruments. TIPS would see maximum $1B purchases in each of the 2 buckets, once a quarter.