US: FED Reverse Repo Operation

• BAX futures are pushing back towards initial lows on Powell’s released remarks.
• In implied yield terms, the nature of the BoC’s conditional guidance from Jan and the BoC decision tomorrow keeps the most active Jun’23 relatively restrained with +3.5bbps.
• Larger moves further out though, led by the Sep and Dec’23 yields climbing 9-8.5bps (lagging US rates close to +15bps). It sees the BAH3/Z3 spread on track for its highest close of the cycle at 0.085 after the substantial, US-driven higher for longer push has reversed significant cuts since the Jan meeting (from circa -0.75).

The UK and German curves flattened Tuesday, with EGB periphery spreads widening modestly.

• The session began with a strong beat for German factory orders, but more impactful was a drop in inflation expectations in the ECB's Consumer Expectations survey - which saw Bunds extend to intraday highs.
• Bunds and Gilts declined thereafter, with the selloff accelerating in mid-afternoon on hawkish comments from Fed Chair Powell.
• The long end would bounce from session lows but the short end fared worse, with ECB terminal rate expectations rising to a new cycle high of 4.16%. That underperformance meant sharp flattening in the German and UK curves.
• Gilt reaction was limited to BoE hawk Mann who said little new in comments today; ECB dove Herodotou likewise did not move the needle in calling the inflation fight "far from over".
• Wednesday sees German industrial/retail sales and final Eurozone GDP data, Bund and PGB supply, and appearances by BOE's Dhingra and ECB's Lagarde and Panetta.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 0.4bps at 3.311%, 5-Yr is down 5.2bps at 2.846%, 10-Yr is down 5.7bps at 2.692%, and 30-Yr is down 5.6bps at 2.607%.
• UK: The 2-Yr yield is up 2.4bps at 3.8%, 5-Yr is down 0.3bps at 3.7%, 10-Yr is down 4.4bps at 3.822%, and 30-Yr is down 6.3bps at 4.151%.
• Italian BTP spread up 0.9bps at 183.5bps / Greek up 5.8bps at 180.8bps