OPTIONS: Larger FX Option Pipeline

• The MNI Markets team thinks that with growth already starting to show some signs of slowing and with Bank Rate getting back to neutral (and potentially in the eyes of some additional MPC members into restrictive territory) that the limitation to upside inflation expectations from the energy price support scheme will be enough to sway the majority of MPC members to vote for a 50bp hike rather than a 75bp hike. We also think the “forceful” language will be maintained at least until the new November MPR forecasts.
• However, this is far from a foregone conclusion and since the August MPC meeting we have only heard from four MPC members.
• The MNI Markets team is concerned that the risks of a delay or alteration to the plan for active gilt sales is much higher than the market anticipates. We discuss this and the Bank of England's options if it decides not to confirm the beginning of active gilt sales this week.

Tsy futures broadly weaker but off session lows ahead the $12B 20Y-Bond auction re-open (912810TK4) at the top of the hour. WI is currently running around 3.837%, appr 45.7bp cheap to last month's high yield.

• Aug recap: Tsy futures gapped back to session lows after weak $15B 20Y bond auction (912810TK4) tailed: 3.380% high yield vs. 3.355% WI; 2.30x bid-to-cover vs. prior month's 2.65x.
  
  
  • Indirect take-up fell back of 66.97% vs. prior month's 77.97% high; direct bidder take-up climbed to 18.32% vs. 14.09% prior, primary dealer take-up rebounded to 14.71% vs. 7.94% low.
• Timing: The 20Y note results will be available shortly after the competitive auctions closes at 1300ET.

• RES 4: 118-00 High Aug 26
• RES 3: 117-13+ 50 day EMA values
• RES 2: 116-03+/26 20-day EMA / High Sep 2
• RES 1: 115-01 High Sep 15
• PRICE: 113-25 @ 16:40 BST Sep 20
• SUP 1: 113-20+ Round number support
• SUP 2: 113-19 Low Jun 19 2009 (cont)
• SUP 3: 113-06 2.236 proj of the Mar ‘20 - Apr ‘21 - Aug ‘21 swing
• SUP 4: 112-25+ Low Jun 11 2009

Treasuries remain soft and the contract traded lower Tuesday. Importantly for bears, the contract breached key support at 114-06, the Jun 14 low. The break confirms a resumption of the broader downtrend and strengthens the underlying bearish condition. This paves the way for a test of the 114.00 handle where a break would open 113-19, the Jun 19 2009 low (cont). Initial firm resistance is at 116-03+, the 20-day EMA.