AsiaPac Bond Briefing: Twist Flattening Continues In Asia, Sale Of 5s Due; JGB Futures Underperform, Add To Overnight Losses

THE ASIA-PAC SESSION

Treasuries are mostly richer heading into European hours, with only front-end Treasuries seen dealing a little cheaper at writing. The mixed showing in Treasuries sees them continuing to unwind some of the recent, well-documented steepening in the curve as participants in Asia have chewed over Tuesday's statements from Trump administration officials (and Trump himself) possibly signalling de-escalations in issues such as Fed Chair Powell's dismissal from the Federal Reserve, as well as the ongoing trade war with China

TYM5 is +0-04 at 110-29+ on volume of ~180K lots at writing, operating towards the upper half of a 0-14 trading range established since the open, having risen from a low of 110-18 seen right at the start of today's trade. The decent bid in the contract sees it trimming some of a three-session streak of losses seen prior (0-19 in total)

Taking a step back, the contract remains off of its near-two-month low of 109-08 made towards the middle of this month, consolidating losses after dropping from a 13-month peak of 114-10 made towards the start of this month, having rebounded modestly from a near-two-month low of 109-08 made just over a week ago

UP NEXT

Flash PMIs for Apr will headline matters in NY dealing (1345GMT), coming after weekly mortgage application data (1100GMT), and just ahead of new home sales data for Mar (1400GMT). The Fed will also release its Beige Book detailing economic conditions across the 12 Fed districts (1800GMT), which should provide for interesting reading given that some time has passed towards Trump's initial tariff salvoes

The Treasury will sell $30bn of 2-Year FRN (1530GMT) and $70bn of 5-Year Notes (1700GMT) via auction today. Note that the Treasury will sell $44bn of 7-Year Treasuries on Thursday as well

Fedspeak will be headlined by Chicago Fed Pres Goolsbee ('27 voter, 1300GMT), St Louis Fed Pres Musalem (voter, twice at 1330GMT and 1835GMT), Fed Gov Waller (permanent voter, 1335GMT), and Cleveland Fed Pres Hammack ('26 voter, 2230GMT)

Note that apart from Hammack, all other Fed officials are scheduled to deliver opening/closing remarks, which may limit the scope for meaningful commentary on monetary policy

THE DAY THAT WAS

To recap Tuesday's moves, cash Treasuries went out 5.5bp cheaper to 2.5bp richer across the curve come the close, twist flattening and pivoting around 7s, with an initial, very modest cheapening impulse seen at the open giving way to further underperformance in the front end, while the long end reversed losses by the end of the day's trade. The showing on Tuesday helped to unwind just some of the twist steepening that had been seen in the space in sessions prior, recalling that the US Treasury curve had ended sharply steeper on Monday

Part of the unwinding of the US Treasury curve steepening had come in the wake of assurances from US president Trump that he "never did" have any plans to fire Fed Chair Powell, saying that he had been merely suggesting that Powell "be a little more active in terms of his idea to lower interest rates"

• This obviously does run counter to prior messaging from Trump administration officials (NEC Director Hassett said last Friday that the administration was studying how to boot Powell from the Fed)
• Beyond this event's utility re: confirming how quickly mood shifts can happen in the White House, it also perhaps points to the Trump administration being willing to backtrack on positions depending on moves in the market (particularly that of US Treasuries)

Somewhat adding to the list of backtracks, US Treasury Secretary Bessent said at a closed-door event that he expects a de-escalation with China, given how unsustainable the current situation is. His remarks drove a bid in risk assets, with Chinese stocks (ADRs) and US stocks seen gaining to end in the green come the NY close

US President Trump was asked about Bessent's comments later in the day, saying that the US was "doing fine" with Sino-US relations, and that he doesn't expect a "hardball" negotiation with China

• He also said that he would "be very good to China' and that the final tariff figure would not be "anywhere near" the prevailing 145%

Fed Gov Kugler (permanent voter) said that she sees "upside risks to inflation and downside risks to employment", observing that as tariffs have come in "significantly larger than previously expected", so to does the Fed expect that "the economic effects of tariffs and the associated uncertainty are also likely to be larger than anticipated"

Pricing for Fed rate cuts this year has remained rather muted - particularly as the barrage of tariff escalations between China and the US has died down, while official statements from several negotiating parties have seemed to largely promise quick "deals" to be struck with the US (although US-Japan negotiations appear to have some distance between the two parties at present)

• Fed funds futures currently price in ~81bp of rate cuts through to end-'24, pointing to fully priced in expectations for three 25bp rate cuts this year - down from a peak of ~97bp of cuts priced in just earlier this week on Monday
• Looking at closer timings, participants are seeing virtually negligible odds of a 25bp rate cut come the Fed's upcoming 7 May monetary policy decision, with just ~2bp of cuts priced in (<10% odds)

The latest auction of 2-Year Treasuries drew weak demand, with yield at 3.795%, tailing the screen bid of 3.789% by 0.6bp with 77.99% at the stop. Cover fell to 2.52x from 2.66x prev., undershooting the prior 5-auction average of 2.67x.

• Indirects took a record 56.2% (75.8% prev., prior five-auction average of 76.0%, directs took 30.1% (13.6% prev., prior five-auction average of 13.6%, while primary dealers took 13.7% (10.6% prev., prior five-auction average of 10.3%)

The day's US data releases were largely of little consequence to Treasuries, with the Philly Fed Non-Manufacturing gauge for Apr (-42.7; Mar -32.5) deteriorating from Mar, while the Richmond Fed Manufacturing Index reading for Apr (-13; BBG median -7; Mar -4) came in worse than expected - all in all, largely painting a picture of weakening economic activity given the gloom cast by government policy action

ACGBs

ACGBs are mixed at writing, tracking the mixed showing in US Treasuries from Tuesday, although they have cheapened a tad since the Sydney open. YM is -7.0, operating just off fresh session lows (at -8.0), while XM is +1.0, consolidating lower after a failed challenge of its overnight peak (+3.0). Bills run 3 to 9 ticks cheaper through the reds, bear steepening

The latest sale of A$1.0bn of ACGB Apr-29 (#TB138) drew decent demand, with cover seen at 3.22x (4.21x prev.), while the weighted average yield printed 0.88bp through prevailing mids - signalling healthy appetite for the line. There wasn't much by way of a reaction in ACGBs on the release of results from the auction, with yields around the belly of the curve seen sticking to around their highest levels of the day so far after

• There were 38 bids in total (33 prev.), of which 14 were successful (10 prev.), and 8 were awarded in full (5 prev.).
• The amount allotted at the highest accepted yield as a percentage of the amount bid at that yield was 93.1% (50.0% prev.)

The flash PMI readings for Apr showed a modest deterioration in both the manufacturing and services gauges, indicating a slightly slower pace of expansion for both sectors - although still pointing to a 4th and 15th straight month of expansion for both respectively. S&P Global noted that the Apr report showed that "business conditions further improved", as "domestic demand continued to act as a strong proponent for business activity growth" in Q2 so far. Companies are also continuing to raise staffing levels at a "solid pace" (S&P Global link here)

• Apr P Manufacturing PMI 51.7; Mar 52.1
• Apr P Services PMI 51.4; Mar 51.6
• Apr P Composite PMI 51.4; Mar 51.6

NZGBs

It was another quiet session in NZ today (domestically speaking), with no data releases nor major macro headline drivers of note observed throughout. Note that the next data release of note (also the only remaining data point for the week) will be the ANZ consumer confidence gauge for Apr, due on Thursday

• ICYMI, NZ Debt Management announced the sale of NZ$250mn of NZGB May-30 and NZ$250mn of NZGB May-36 via auction for tomorrow (Thursday), alongside the sale of NZ$25mn of I/L bonds (NZ Debt Management link here)

NZGBs are mixed heading into the close, tracking the twist flattening in US Treasuries from Tuesday, although they have cheapened since the open, with the front end running ~6bp cheaper from opening levels, while long-end NZGB yields have shifted higher by a more restrainted 1.5-2.0bp

• 2-Year NZGB yields are at ~3.26%, down from its cheapest level seen in 1.5 weeks (at ~3.28%)
• 10-Year NZGB yields are at ~4.52%, continuing to hold on to much of a richening impulse seen around the middle of the month (had peaked at ~4.81% on 14 Apr), having consolidated around the 4.50% mark for the past week so far

ICYMI, NZ Debt Management announced that there will be five nominal bond auctions in May, with one auction to be held each week - offering NZ$450mn apiece (used to be NZ$500mn at each auction). Not much of a surprise here, with nothing by way of a decisive move in NZGBs observed at the open, with participants happy to track moves in core global bonds for now (NZ Debt Management announcement here)

• A planned auction on 22 May (Thursday) will be held on 23 May (Friday) instead out of consideration for the handing down of the Budget (scheduled for 22 May)

Keeping domestically, the Trade Me property website noted that the number of listed properties for rent on the website was up ~41% on a Y/Y basis - rising to its highest in over 10 years. The website also noted that rent in Auckland is down ~1.4% Y/Y, while rent in Wellington is virtually unchanged across the same horizon

• Trade Me said that "those seeking residential rental accommodation should feel empowered, there's a wider range of options available and tenants have more negotiating power than they have had in years"
• As it stands, this should go some way to supporting the view that price pressures in NZ are remaining within the RBNZ's target range, particularly as rent makes up a significant chunk of the CPI measure
• That being said, matters here have focused to downside risks to the outlook (particularly from the external environment), which should leave inflation-related matters taking a back seat for now (barring a large, sustained surge in price pressures)

As it stands, OIS markets are pricing in ~27bp of rate cuts come the upcoming 28 May monetary policy decision, with pricing re: the matter having moderated since the middle of the month - albeit only by a little (was ~30bp priced in around mid-Apr)

• Looking further out, a cumulative ~80bp of cuts continues to be priced in for the Nov '25 monetary policy decision (pointing to fully priced in odds for three 25bp rate cuts) - not that much changed from levels seen across the past two weeks

JGBs

JGB futures are -36 ticks at 140.34 in the second half, respecting its pre-lunch range at writing, trading above session lows made right at the Tokyo open (-50 ticks at 140.20), with the contract seen plunging from its overnight close (-11 ticks at 140.59) then despite the lack of a clear headline driver or matching moves in Treasuries (10-Year Treasuries were cumulatively richer from Tuesday's session). JGB futures are on track for a third straight lower daily close, although still otherwise continuing to respect the range carved out over the past three weeks so far

• Taking a step back, the decline in JGB futures in recent weeks trims only a portion of the strong bid seen in JGBs at the start of Apr (amidst expectations for the BOJ to hold off on rate hikes on uncertainty around the external outlook - as well as on supportive domestic economic data)
• The contract currently runs nearly ~200 ticks firmer than levels seen at the start of the month

The JGB cash curve is flatter today, running 3.0bp cheaper to 4.5bp richer across the curve, twist flattening and pivoting around 10s. With the yen continuing to exhibit strength, further cheapening in super-long end JGBs should run up against increasing opposition

• 30-Year JGB yields are at ~2.72% - at levels that Japanese life insurers have identified as attractive enough for further investment, although it remains to be seen if participants are expecting further losses in that zone of the curve for now (in particular due to a US Treasury-led cheapening in long-end bonds)

The flash manufacturing PMI reading for Apr showed the sector contracting at virtually the same pace as in Mar (10th straight month of contraction), while the services PMI showed a rebound into expansion - with that gauge now coming in at/above the neutral 50.0 mark for a sixth straight month. (Jibun Bank report here)

• Apr P Manufacturing PMI 48.5; Mar 48.4
• Apr P Services PMI 52.2; Mar 50.0
• Apr P Composite PMI 51.1; Mar 48.9

S&P Global said that Japanese firms as a whole have now signalled an increase in business activity for five of the past six months, driven by improvements in services activity - although "the downturn in manufacturing productions also eased" in Apr

• S&P Global also further observed that the divergence between sectors has also come in across new business inflows - factories are experiencing new orders decline "at the steepest rate in over a year amid a strong deterioration in foreign demand, as well as reports of subdued client spending and concerns over tariffs"
• Inflationary pressures however remain "acute" across both the manufacturing and services sectors
• In all, "uncertainty over the global economic outlook and trade environment, staff shortages and an ageing population dampened confidence across both the manufacturing and service sector"- nothing too surprising here
• The year-ahead outlook for output fell to its lowest seen since Aug '20

Keeping domestically, headlines have been centred on the Japanese government considering various concessions in ongoing US-Japan trade talks (such as on rice imports and relaxing automobile safety rules), with a US source to POLITICO saying that the Trump administration is "closing in" on "general agreements" with both Japan and India although said "deals" will "likely to leave many of the thorny details to be hashed out at a later date"

• Sources said that US officials are working on getting "“memorandums of understanding” or a broad “architecture” for future deals" signed - certainly seems short of a full trade deal, if confirmed
• A source said that it "may take months to hammer out the final deals"
• In all, it leaves the 90-day deadline to avoid reciprocal tariffs still looking like quite a tall order for the balance of >60 countries looking to negotiate a "deal" with the US by July this year

Turning to other matters, ICYMI, PM Ishiba has announced that gasoline prices will be cut by 10 yen per litre starting in May. Diesel (-10 yen/litre), heavy oil (-5 yen/litre), kerosene (-5 yen/litre) and aviation fuel (-4 yen/litre) prices will be cut as well, with the subsidies aimed at alleviating rising costs of living

• Ishiba said to reporters on Tuesday that he has not decided how long the measures will be kept in place
• Ishiba also said that the government will introduce measures to trim utility bills starting from July (the summer months), with details due to be decided upon in May

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