US: FED Reverse Repo Operation

US Tsy $43B 5Y-Note auction (91282CGP0) at the top of the hour, WI currently running around 4.112%, 58.2bp cheap to last month's stop.

• January auction review: Tsy futures gained slightly after $43B 5Y note auction (91282CGH8) stopped through: 3.530% high yield vs. 3.555% WI; 2.64x bid-to-cover vs. 2.46x the prior month.
• Indirect take-up at 75.74% vs. 64.51% prior; Direct take-up 15.44% vs. 18.56% prior; Primary dealer take-up 8.82% vs. 16.92%.
• Timing: The 5Y note results will available shortly after the competitive auctions closes at 1300ET.

Tsys trading firmer at midday, bonds off the lowest level since mid-November tapped overnight (USH3 123-30) currently 124-20. Tsys bounced after early StL Fed Bullard interview on CNBC siphoned some hawkish positioning out of markets ahead of the Feb FOMC minutes release at 1400ET.

• StL Fed Bullard sees "tough road ahead" on inflation, rates reaching 5.375%, he states "we have a good shot at beating inflation in 2023", while market may be overpricing chances of recession.
  
  
• Equities took positively as well, ESH3 climbing to 4020.0 high before paring gains on Washington Post article saying META to lay off thousands of employees - later rebutted by META's comms director Andy Stone.
• Yield curves steeper but off highs (2s10s +1.373 at -76.062 vs. -73.312) as short end traded strong: Fed funds implied hike for Mar'23 at 28.9bp (-.7), May'23 cumulative 53.8bp to 5.122%, Jun'23 69.7bp to 5.280%, terminal at 5.335% in Aug'23 vs. 5.37% high.
• Heavy two-way trade (TYH3>2.3M) driven by quarterly futures rolls from Mar'23 to Jun'23 ahead next Tue First Notice (Jun'23 takes lead). Pre-auction short sets ahead $43B 5Y Note auction at top of the hour.

UK and German cash yields pulled back from session highs to finish mostly lower Wednesday. Bunds outperformed, with modest bull steepening in the curve; UK yields closed mixed.

• 10Y Bund yields tested multi-year highs of 2.5744% (hitting 2.5740%) before retracing by the cash close as the Feb-33 saw a strong auction and ECB terminal pricing pulled back 6bp.
• Likewise UK 10Y yields pulled back from 6-week highs, reversing some of the post-PMI selloff, mirroring a pullback in BoE hiking expectations.
• Various catalysts for the intraday reversal included ECB's Villeroy saying that market hike pricing had gone too far, and Fed's Bullard taking some of the impetus out of the FOMC minutes later Wednesday by saying he sees a good shot at subduing inflation this year.
• Periphery EGB spreads stabilised after an early widening.
• Thursday sees Eurozone final inflation figures and commentary from BoE's Mann and ECB's de Cos.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 2.8bps at 2.921%, 5-Yr is down 2.1bps at 2.581%, 10-Yr is down 0.9bps at 2.52%, and 30-Yr is up 4.5bps at 2.508%.
  
  
• UK: The 2-Yr yield is up 0.4bps at 3.923%, 5-Yr is up 0.2bps at 3.562%, 10-Yr is down 1.4bps at 3.6%, and 30-Yr is down 2.1bps at 3.988%.
  
  
• Italian BTP spread up 0.3bps at 194bps / Spanish down 0.6bps at 98.4bps