- UST NY Recap: USTs sold off y’day in a parallel fashion as 5y, 10y and 30y yields each rose by 4bps. News that the Greek bailout has been approved dominated the market in early trade, causing treasuries to sell off and the EUR to spike as dip buyers shortly stepped in. We heard some good RM selling in USTs which helped them underperform bunds by around 2.5bps, as treasuries printed new session lows just ahead of the 2y supply. The 2y auction was solid, and consistent with recent supply events. Later in the session, we heard RM buying in treasuries and some short covering from numerous accts helping the grind higher, as well as HF selling of S&P futs. TIIPs yields rose and BEIs turned higher as investors looked for inflation protection after seeing oil and gasoline rise to highs for 2012. Desks saw good demand from RM accounts, especially in the new 30y TIIPs. The 30y outperformed, widening by 2bps. The 5y, 10y and 20y widened by 6bps, 3bps and 3bps respectively.

- US Fed Ops: The Fed is scheduled to buy $1.5-2bn in the 20-30y sector. Feb41s, May41s, Aug39s, Feb42s, and Nov39s look cheap versus the Treasury spline.

- US 5yr auction: the Treasury is scheduled to auction $35bn in 5s, where demand remains robust. The b/c ratio has generally remained above the previous 12m average in the previous few auctions. Likewise, the previous five auctions have all come through, by an average of 1.1bp

- USTs in Tokyo: USTs are lower, slightly steeper. Volumes are above average. Around mid-morning, a seller hit the market lower and has kept us down. US 141.08 -9, TY 130.17 -3 1/2, FV 123.03 -1 1/2, TU 110.06 1/4 -1/4, SP 1361.60 +1.50, Eur 1.3228 -18

- European Fixed Income: Bunds to open around 137.92 (-4) . At 10:30GMT, Germany will auction a new 2y 03/14 Schatz for E5bn (est. 46k Schatz futures equivalent). Desks suggest that the new Schatz should benefit from CTD status, a factor which should prove supportive of the auction. Dealers note that new issue has not traded yet on basis or roll, which is quite unusual, and is likely to have an ASW spread of around 3bps over the current benchmark, which would imply a yield of around 0.29% at auction. German auctions have fared very well so far this year, and the 2y sector is no different, desks suggest that strong demand at the previous 2y supply should bode well for the auction.

- Gilts: At 09:30GMT, the BoE Minutes for the 8-9th Feb meeting are due for release. At the Feb meeting the bank increased the size of the APF by £50bn to £325bn. Analysts note that of particular interest will be the voting from different members on the size and form of this latest extension of QE. There is no consensus for the QE voting pattern, though many analysts are expecting a very small minority of the more hawkish members to have voted not to extend purchases. Some suggest that we may see a three-way split amongst the MPC, with some of the more Dovish members, such as Posen, voting for a £75bn extension, King and a majority in favour of a £50bn extension, and one of the more hawkish members, such as Dale, to have voted for no extension.

- At 14:45GMT, BoE will be buying in the 7-15y sector for £1.5bn. Previous sub/cover was high at 3.84x with most of the gilts clearing near the mid-market level.

- Euribor & OTC: At 10:00GMT, the ECB’s 7-Day $ allotment is due, where $3.7bn is maturing.

- Economic Releases: At 06:30GMT, France CPI for Jan is expected to fall to -0.2% (vs. 0.4% prev). Analysts suggest that goods prices are likely to have fallen through January as the new winder sales season starts. While prices are expected to have fallen,analysts see some upside risks given the rising energy prices, in particular the price of crude, as well as the 4.4% rise in the regulated natural gas price.

At 08:28GMT, German PMI for Feb (prelim) is due, consensus is for a rise in the mfg survey to 51.9 (vs. 51.0 prev). Desks note that while the headline index rose above 50 in January, the new order component is still below this key level. Analysts will look for improvement in the new order component to signal a stabilisation of economic growth.

Eurozone PMI surveys for Feb (prelim) are expected at 08:58GMT, consensus is for a fall small rise in both mfg and services surveys to 49.2 (vs. 48.8 prev) and 50.6 (vs. 50.4 prev), respectively. In Jan, mfg PMI rose as the falling rate of new order and new export orders declined. Analysts suggest that this trend is likely to continue, however do note that the rising oil prices and continuing sovereign debt crisis should result in the PMI staying in sub-50 territory.

- Speakers/Other Events:  No key speakers for the session.

ITC Fixed Income Morning Recap:

- USTs in Tokyo/London: USTs opened lower in Tokyo- catch up with Bunds yesterday. There were some early dip buyers, accounts picking away at the low end of the recent range. As the Eurgroup news hit the wires, USTs were hit lower and Eur spiked. The belly led the move lower, but the sell-off was met by further dip buyers in 10s by Asian Central Bank The market has since firmed up off thir lows, also aided by the reversal in the Eur. London has seen more of the same- lots of extensions out of 2yr to 3yr, good Asian buyer of CT7s and general RM short-covering/establishing longs. US 141.20 -15, TY 130.20+ -9, FV 123.05 1/4 -4 1/4, TU 110.06 3/4 -1/4, SP 1363.50 +3.60, Eur 1.3234 -5.

- US Supply: Today, the Treasury is scheduled to auction $35bn in 2s. Auction statistics show steady demand for the sector. The bid-cover ratio remains comfortably above the previous 12m average. At the same time, only one of the previous six auctions has tailed and that too not by much – the January auction tailed by 0.25bp. This is not surprising, given the low realized volatility at the 2y tenor.

- US Supply this week: The Treasury will auction new 2y, 5y and 7y notes for a combined $99bn. Net cash-flow for the week is negative with no coupons or redemptions due, though we do note large cash-flows on the settlement date of this week’s auction of$66.4bn (Coupons $4.64bn and Redemptions $61.72bn) . As part of Operation Twist, the Fed will purchase up to $4.0bn in the 24-30y sector, and sell up to $8.5bn in both the 0.8-1.3y and 2.2-3y sectors.

- US Fed Ops: Today, the Fed is scheduled to sell $8-8.75bn in Dec12-May13 sector. The Fed’s largest holdings in this sector are 1.75% April13s and 1.375% Feb13s.

- European Fixed Income: Bunds opened lower to the Greek news but have been underpinned by the leaked Troika report. Equities are weak as a result. Eur reverse their gains. Swapped issuance are also underpinning. Gilt syndicate book went well- and have Gilts bid. As for flows today, there’s been decent bank selling of 2yr France, good buying 5yr AAA by European real money.

- Euribor Opts: Quiet start with focus on March downside. There have been no large trades as of yet, but the theme this morning has been downside in March (expiry in 27 days). Paper bought 2k Mar12 99.00 Put for 1 tick, Paper bought 5k Mar12 98.75 Put for 0.25 tick, Paper sold 4.5k Mar12 98.87/99.00/99.12/99.25 Call Condor at 10 ticks Paper also bought 1k Sep12 99.25/99.12/99.00/98.87 Put Condor for 2.5 tick

- Eur Swaps: SocGen 5yr (MS +225 area), Danske 5yr (MS +235 area), FGA 5yr, Securitas 5yr (MS+125), Thyssenkrup 5yr (MS+300a)

- Gilts: Good demand for the syndicated 0.375% 2062 index- linked gilt. Book closed, but allocations later. Futures bid as the long-end leads the charge higher- assuming linker related. Gilts have also seen good Central Bank buying of the short-end and good domestic buying of 10yr. Generally, dealers think the book size is pretty much in line with expectations.

- Short Sterling: 10k Dec12/Mar13 Spreads sold at 0.01. This is the most active spread this morning with 2k bought at 0.02 earlier. Total volume is 14k, 20% above the 5 day average.

ITC on European Swaps- could be a volatile few weeks with PSI hedging flows. With the restructuring of the Greek debt conditions finalised via the PSI, banks that have held these securities in their bank books as asset swaps may now be forced to unwind these positions. This would result in financial institutions RECeiving in swaps with maturity corresponding to the maturity of the Greek bond debt held in their books. A lot of these PSI unwinds have already taken place, but the big question is how much is left to be done. They also may want to re-enter the hedge in the new bond. However the question is how many can swap a 5y exposure (say) with 30y. Their fund’s constitution might not allow it

- USTs in Tokyo: USTs opened lower in catch up with Bunds yesterday. There were some early dip buyers, accounts picking away at the low end of the recent range. As the Eurgroup news hit the wires, USTs were hit lower and Eur spiked. The belly led the move but the sell-off was met by further dip buyers in 10s by Asian Central Bank. The market has since firmed up off their lows, also aided by the reversal in the Eur (high 1.3296, last 1.3268). US 141.23 (-12), TY 130.21 1/2 (-8), FV 123.04 3/4 (-4 3/4), TU 110.06 (-1), SP 1365.40 +5.70

- US Supply tomorrow: Today, the Treasury is scheduled to auction $35bn in 2s. Auction statistics show steady demand for the sector. The bid-cover ratio remains comfortably above the previous 12m average. At the same time, only one of the previous six auctions has tailed and that too not by much – the January auction tailed by 0.25bp. This is not surprising, given the low realized volatility at the 2y tenor.

- US Supply this week: The Treasury will auction new 2y, 5y and 7y notes for a combined $99bn. Net cash-flow for the week is negative with no coupons or redemptions due, though we do note large cash-flows on the settlement date of this week’s auction of$66.4bn (Coupons $4.64bn and Redemptions $61.72bn) . As part of Operation Twist, the Fed will purchase up to $4.0bn in the 24-30y sector, and sell up to $8.5bn in both the 0.8-1.3y and 2.2-3y sectors.

- US Fed Ops: Today, the Fed is scheduled to sell $8-8.75bn in Dec12-May13 sector. The Fed’s largest holdings in this sector are 1.75% April13s and 1.375% Feb13s.

- European Fixed Income: Bunds look set to open around 137.96 (-1)- downside risks. Finally the Greek deal has been done- E130bn package, debt/GDP to 120.5% by 2020. Tokyo has seen small bank selling of German 10yr. Technically, a clear break of 137.89 remains needed to retarget the 136.93 low.

- Note: There will be a technical briefing: Second adjustment programme for Greece – Tuesday, 21 February 2012 at 10.30CET

- {EU} Eurogroup statement   http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ecofin/128075.pdf

- Gilts: The UK are scheduled to tap the 50y 0.375 03/62 via syndication for an estimated £3.5bn. While the timing has not yet been specified many desks are expecting the launch today, as has been seen in the past. The issue is thought be done straight and therefore should weigh on gilts. Desks note that in the coming 5 weeks there is an abundance of supply scheduled in the long-end of the linker curve including a syndication and two auctions which will likely provide a test for the market to absorb. The UKTI 0.375 03/62 has a RY around 40bps lower than at the initial launch in Oct and looks rich on an outright basis. In ASW however, desks suggest that the adjacent 11/55 issue is trading around 5bps richer and that should result in relative value switching into the tap, likely narrowing the spread. Desks suggest that the very high convexity of the issue makes the issue attractive given the UK requirement for pension funds to match assets with liabilities and therefore have a bias to be long duration.

- The BoE will continue their APF operations at 14:45GMT, buying in the 15y+ sector for £1.5bn. The previous sub/cover came in at 2.46x, which is relatively higher, however the pricing data showed the bank paying up for most of the gilts offered which caused a sharp rally in the long gilt future.

- Euribor & OTC: At 10:15GMT, the ECB’s 7-Day MRO is expected to see E135bn allotted, with ?143bn maturing (Reuters poll). Then at 12:00GMT, the ECB will attempt to sterilise ?219bn via 7-Day Term Deposits.

- Economic Releases: At 09:30GMT, UK PSNB (ex. Interventions) for Jan is due, consensus is a surplus print of -6.3bn. Last month, net borrowing came in much better than expected at 13.7bn and the improvement is January is likely to be the result of quarterly corporation tax figures and high self-assessment tax receipts, this should keep the UK government on track to meet their 11/12 FY fiscal targets.

Eurozone Consumer Confidence for Feb (prelim) is due at 15:00GMT, analysts expect a small improvement to -20.3 (vs. -20.7 prev.) this would show consumers’ perceptions of the general economic situation have shown a modest improvement. While the uncertainty surrounding the sovereign debt crisis continues to weigh on sentiment, desks suggest that the improving PMIs in January should prove supportive.

- Speakers/Other Events:  No European speakers scheduled for the day, however after the European close, the BoE’s Bean will be speaking in Glasgow at 19:30GMT.

ITC Fixed Income Morning Recap:

- USTs in Tokyo/London: Cash and Swaps closed (President’s day). No flows of note.

- US Supply tomorrow: On Tuesday, the Treasury is scheduled to auction $35bn in 2s. Auction statistics show steady demand for the sector. The bid-cover ratio remains comfortably above the previous 12m average. At the same time, only one of the previous six auctions has tailed and that too not by much – the January auction tailed by 0.25bp. This is not surprising, given the low realized volatility at the 2y tenor.

- US Supply this week: The Treasury will auction new 2y, 5y and 7y notes for a combined $99bn. Net cash-flow for the week is negative with no coupons or redemptions due, though we do note large cash-flows on the settlement date of this week’s auction of $66.4bn (Coupons $4.64bn and Redemptions $61.72bn) . As part of Operation Twist, the Fed will purchase up to $4.0bn in the 24-30y sector, and sell up to $8.5bn in both the 0.8-1.3y and 2.2-3y sectors.

- US Fed Ops: Tomorrow the Fed is scheduled to sell $8-8.75bn in Dec12-May13 sector. The Fed’s largest holdings in this sector are 1.75% April13s and 1.375% Feb13s.

- European Fixed Income: Bunds gapped lower on Greece optimism. China’s cut in RRR which gave Asian equities a bid. Risk-on tone is keeping Bund upside in check, although one headline today from Finland which suggests the final approval may be held back until March 12th. BTPs opened better bid (large coups/redemptions next week). Semi-core seeing some tightening, with Belgium reversing some of the widening seen on Friday (possible 5yr syndicate coming? and 1bn short-fall in Belgium finances). Bunds found stops on the open (small) and we low printed 137.99 before bouncing quickly. Break of 137.89 is needed to warn of a more conclusive failure.

- All eyes on the Eurogroup meeting today- begins at 9:30 New York/14:30 GMT today. Agenda http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/12/117&format=HTML&aged=0&language=EN&guiLanguage=en

- ITC on European Swaps- could be a volatile few weeks with PSI hedging flows: With the restructuring of the Greek debt conditions finalised via the PSI, banks that have held these securities in their bank books as asset swaps may now be forced to unwind these positions. This would result in financial institutions RECeiving in swaps with maturity corresponding to the maturity of the Greek bond debt held in their books. A lot of these PSI unwinds have already taken place, but the big question is how much is left to be done. They also may want to re-enter the hedge in the new bond. However the question is how many can swap a 5y exposure (say) with 30y. Their fund’s constitution might not allow it

- Gilts: The week sees the UK tap the 50y gilt  linker via syndication (probably tomorrow). Cash-flow for the week is negative with no coupons or redemptions due to be repaid. The BoE continue their QE operations this week, purchasing £1.5bn in each of the 3-7y, 15y+ and 7-15y sectors.

- Eur and GBP swaps: a few deals today. Eur 1.5bn Unedic 3yr (MS+50/55), Eur b/m GE 3yr (MS+80 area), Eur 1 bn Intesa 5yr (MS+360 area), Eur b/m Pohjola 10yr (MS+340 area), Gbp EBRD 3yr (Gilts +48 area) and new €b/m Czech 10yr, desks taking IoIs

- US Fed Ops: the Fed is scheduled to purchase $4.25-5bn in the 6-8y sector. In previous operations in this sector, it has focused on OTR7y securities. This still looks cheap versus the Treasury spline; old 7y (1.375% Dec18s) and triple old 7y (1.75% Oct18s) also look cheap

- European Fixed Income: Bunds opened lower with USTs. Flows/volumes have been light. One Flattener trade was seen via options- Paper bought the RXH2 140/141 call spreads vs selling OE 125.75/126.25 call spreads. In EGB cash space, France opened up 3-5 tighter across the curve. Dealers saw early Asian CB buyers of 3-4yr Germany and French Treasury desk selling 2yr Germany and France. Front DSL is better bid- no idea if flow driven. Belgium bonds are flying- 8-10bps across the curve with 7-10yr leading. These flows have kept the pressure on bunds this AM. Strong UK retail sales knocked Gilt futures 40 cents, but found support ahead of last Friday’s gap levels at 114.90/65.  A lot of focus on the Jan Retail deflator number this morning, which printed 2.2%, lowest since Nov 2009- although the figure is very subject to the VAT effect. Gilt 2062 Linker syndicate next week should keep Gilts pressured. According to Citi WGBI month-end rebalancing- The extension in the index should be muted by the central bank operations and should put steepening pressure on the gilt curves (UK -0.01 years). European Swaps have been muted- better RM and Bank Trsy desk interest to PAY swaps. One deal for today- Eur 1 bn BNP 5yr Senior, MS+150 bps area, BNP sole.

- UST NY Recap: Treasuries sold off on Thursday as 5y, 10y and 30y yields rose by 8bp, 7bp and 6bp, respectively. Economic data was stronger as Initial Claims fell to 348k (vs. 365k f/c), Housing Starts were at beat at 699k (vs. 675k f/c) and the Philly Fed printed at 10.2 (vs. 9.0 f/c). Die Welt reported that the ECB and other Eurozone CBs will exchange their Greek bonds for new bonds to help the Greek debt deal, which saw treasuries sell-off sharply. The disappointing 30y TIPs auction drove both futures to session lows (see attached for full analysis; pg 3), helped by a 3.75k block sale of WNH2 which hit the tape just in front of the TIIPs supply. From the lows, we heard better RM buyers emerge, with accts looking to buy long-end on the weakness on an outright basis and as part of 5s30s flatteners. Comments out of German Lawmakers suggesting they target Fed 20th for the Bailout approval put the TY under pressure into the close.

- US Fed Ops: the Fed is scheduled to purchase $4.25-5bn in the 6-8y sector. In previous operations in this sector, it has focused on OTR7y securities. This still looks cheap versus the Treasury spline; old 7y (1.375% Dec18s) and triple old 7y (1.75% Oct18s) also look cheap

- USTs in Tokyo:  A very quiet session. US 142.09 (unch), TY 130.30+ -1, FV 123.09 -1/4, TU 110.06 3/4 +1/4, SP 1354.80 unch, Eur 1.3128 +24.

- European Fixed Income: Bunds to open around 138.61 (-42). No European bond supply for the day. At 11:00GMT, the UK will sell 1, 3 and 6 month bills for a combined 3.5bn.

- Euribor & OTC: No data of note.

- Expiries: The Feb ’12 options on all major Equity indices expire at various points through the day – see attached calendar for specific timing.

- Economic Releases: German PPI for Jan is due at 07:00GMT, consensus is for a modest increase of 0.2% (vs. -0.4% prev) this is likely due to the stabilisation of energy prices and would leave the y/y rate at 3.1%.

At 09:30GMT, UK Retail Sales for Jan are out, consensus is a modest m/m decline of 0.2%, after growing by 0.6% in Dec. While the December growth was less than expected, analysts put the improvement down to early discounting from retailers, which suggestsUK retailers continue to struggle, a trend which is expected to continue in Jan.

- Speakers/Other Events:  The ECB’s Knot, hawk, will be speaking at 11:30GMT in London. At 19:00GMT, the BoE’s Posen, a Dove, will be speaking at Warwick University.

- USTs and Swaps in Tokyo/London: Tokyo saw a fair bit of Asian selling/profit taking. One Hong Kong based account was a block seller of intermediates (roughly 200k/DV01) which took us to the session/intraday lows. However, heading into London, as EUR pushed lower (Liikanen comments have weighed on the pair), USTs have found a better bid. There was a bit of noise in Front EDs on the open here in London (see below) but we’ve bounced a little ahead of the 5yr Dutch deal via DDA. If felt like a reasonably sized steepener went through in 5/10s futures space- the 5yr DSTA is thought to be hedged via FV futures (REC in USD swaps) and then basis swap’ed into Eur.

- ITC Eurodollar & OTC: Front Eurodollars were hit hard in early London, although the volumes going through aren’t that large. A couple of names in 3m USD cash paying a tick or 2 higher to get things done- jitters kicking in with moody’s reviewing 17 banks. Since then, we’ve recovered with Equities (and ahead of the Dutch 5yr deals, hedged in USDs,  and basis swapped to Eur). In OTC, FRA/OIS and 3s1s basis all going bid in a panic move for USD. This has led 3m Xccy basis to widen 5bp to -75.3bp, the most its widened since 21 Dec (the  day of the 1st 3y LTRO).

- US Supply: the Treasury is scheduled to auction $9bn in new 30y TIPS. Dealers see good value in 30y breakevens relative to 10s and expect the issue to do well post-auction. They also find the roll on the issue about 0.5bp rich relative to our fair value estimate of +7-7.5bp

- US supply Announcement: the Treasury will announce sizes for the upcoming 2y, 5y and 7y auctions. Dealers expect unchanged sizes at $35bn, $35bn and $29bn, respectively. They also expect the respective rolls to open at 0.25-0.5bp, 2.75-3bp and 2.5-2.75bp, respectively

- US Fed Ops: the Fed is scheduled to purchase $1.5-2bn in 20-30y sector. The OTR 30y (Feb 42s) is eligible for purchase in this operation and looks cheap versus the Treasury spline. In addition, May41, Feb41s, May40s and Aug39s look cheap

- European Fixed Income: Bunds gapped higher on the open. Junker comments late yesterday- expressed high confidence that a decision for Greece will be made at the Eurogroup’s next regular meeting on Monday, February 20- had very little impact on Bunds into the 9pm closes. Instead, the early focus this morning will be on Liikanen’s  comments in the FTD- signals ECB may cut rates in its March 8th meeting after 2nd 3yr LTRO on the 29th Feb. BTPs took an early hit on RBS piece, also aiding the early Bund bid, before grinding lower into the Spanish and French auction bidding deadlines. Bothe auctions went ok- solid 5yr France auction. However, keep an eye on French CDS, we’re up through 200 for the first time since mid-Jan.

- Flows: since the auctions, Bunds have continued to grind higher in general risk-off and Eur weakness, and look poised to test further upside here at January peak at 139.55/59- Above would suggest a large bullish continuation pattern has been completed, to retarget the 140.23 record high.

- ITC Front Euribors knocked lower after 3m€ fixed down 0.4bp – 3-Month Euribor fixed 0.4bp lower at 1.041%, slightly above expectations. The momentum for lower fixes was slowed, with 1 increase (CGD +1bp) vs 19 decreases, compared to yesterday’s ratio of 2 vs 25. The spread of lowest to highest fixings was unchanged at 29bps.

- Gilts: quick sell-off on l/e Gilt auction results. The DMO issued a total of £1.75bn of the 22y 1.75 09/34. The bond was met with average demand and was covered 1.6x (vs. 2.23x, 1.53x and 1.56x at previous reopenings in Aug11, Nov10 and Aug10). The bond sold with a tail of 0.9bp (vs. 0.3bp, 0.4bp and 0.3bps at previous re-openings in Aug11, Nov10 and Aug10).

- UST NY Recap: USTs were mixed on Wednesday as 5y yields fell by 2bps, 10ys were unchanged and 30y yields fell by 0.5bp. Developments in the Greek debt deal continue to drive price action in treasuries. Just after NY opened, EU Sources reported that they considered plans to delay all or part of the Greek bailout but still avoid default, which sent treasuries higher as we heard CB buying the front-end and good RM buying 5s. Economic data was mixed as Empire Mfg posted a strong headline gain, yet a further dissection showed many components falling significantly, while Industrial Production for Jan printed flat (vs. 0.7% f/c). The minutes of the January FOMC showed no new information, though some the initial headlines were seen by some as a bit less dovish, causing a dip in TY which was promptly erased as buyers stepped in (full commentary below). Comments from the EUs Juncker suggested that Greece and the Troika have identified a further €325mn in additional budget savings, saw treasuries sell-off sharply leaving the curve marginally steeper on the session. TIIPs traded slightly higher for the day with BEIs barely moving. 5y, 10y, 20y were close to unchanged and 30y BEIs widened by 0.7bp as the front end outperformed again. Analysts look for continued setup activity from dealers heading into tomorrow’s 30y TIIP auction.

- USTs in Tokyo: 10s saw a block seller which took us to the intraday lows of 131.18, following strong Australian employment numbers. However, dovish  comments from Liikanen in the FTD (signals ECB may cut rates in it’s March 8th meeting after 2nd 3yr LTRO on the 29th Feb) have USTs trading back up at the upper end of the session’s range. US 143.20 +10, TY 131.21+ +3, FV 123.21 3/4 +1 1/4, TU 110.08 1/4 +3/4, SP 1335.20 -7, Eur 1.3023 -38

- US Supply: the Treasury is scheduled to auction $9bn in new 30y TIPS. Dealers see good value in 30y breakevens relative to 10s and expect the issue to do well post-auction. They also find the roll on the issue about 0.5bp rich relative to our fair value estimate of +7-7.5bp

- US supply Announcement: the Treasury will announce sizes for the upcoming 2y, 5y and 7y auctions. Dealers expect unchanged sizes at $35bn, $35bn and $29bn, respectively. They also expect the respective rolls to open at 0.25-0.5bp, 2.75-3bp and 2.5-2.75bp, respectively

- US Fed Ops: the Fed is scheduled to purchase $1.5-2bn in 20-30y sector. The OTR 30y (Feb 42s) is eligible for purchase in this operation and looks cheap versus the Treasury spline. In addition, May41, Feb41s, May40s and Aug39s look cheap

- European Fixed Income: Bunds to open around 139.17 (+8). Junker comments late yesterday- expressed high confidence that a decision for Greece will be made at the Eurogroup’s next regular meeting on Monday, February 20- had very little impact on Bunds into the 9pm closes. Instead, some focus this morning will be on Junkers comments in the FTD- signals ECB may cut rates in its March 8th meeting after 2nd 3yr LTRO on the 29th Feb.

All focus will also be on today’s supply-

- Spain will tap the 3y 4.4 01/15, the 3y 4.0 07/15 and the 7y 4.3 10/19 for a combined E3.0-4.0bn (Combined Bobl futures equivalent 27k). Analysts note that following this auction Spain will have issued around 33% of their targeted issuance for 2012 which is the highest for any of the Eurozone countries. This has been helped by issuing above the target range at numerous auctions this year. Desks note that over the past week all three of the issues have put in some concession, underperforming their peers, with the 07/15 issue experiencing the most concession, cheapening by around 7bps. Overall, desks are expecting stellar domestic demand at auction as has been the case for recent Spanish supply events. However, dealers note that the market sentiment will likely revolve around events in Greece, and depending on how developments unfold, this will be key for this auction.

- At 09:50GMT, France will tap the 2y 3.0 07/14 BTAN, reopen the 3y 2.5 01/15 BTAN and launch a new 5y 1.75 02/17 BTAN for a combined E7.0-8.5bn (Bobl futures equivalent 48k comb). Desks suggest that the 2y tap and 3y reopen are both likely the result of dealer demand, and therefore should be easily absorbed. In terms of the new 5y, desks suggest recent demand in the 5y sector has been strong across, and given this demand the concession is small, offering a discount of around 7bps in ASW terms vs. the current benchmark (07/16). Overall desks suggest that despite the lack of concession, the strong demand seen recently in the sector should ensure this auction is well supported.

At 10:50GMT, France will tap the 10y OATei 1.1 07/22 as well as the 15y OATei 1.85 07/27 and reopen the 11y 2.1 07/23 for a combined E1.3-1.8bn.

- Gilts: UK supply is at 10:30GMT, where the UK will reopen the 22y 1.75 09/34 gilt for £1.75bn (Gilt futures equivalent 32k). Desks suggest that while the 20y sector itself looks cheap vs. 10s and 30s, the 09/34 issue trades around fair value versus the adjacent bonds and has experience limited concession. The auction should find support from the relatively small size of £1.75bn, down from £2.0-2.25bn at recent auctions in the sector. The 7-day exclusion rule for buybacks means this issue will not be eligible in next week’s BoE operations.

- UST NY Recap: USTs rallied and the curve flattened in solid trading levels. The 5y, 10y and 30y yields fell by 3bps, 5bps and 6bps respectively. The overnight and early US rally was again driven by events in Europe and further digestion of Moody’s overnight rating action with particular focus on Italy and Spain downgrades and the outlook “negative” revisions for the UK, Austria and France.  Focus also remained on the ongoing struggle to the Greek bailout negotiations as EU ministers cancelled their scheduled meeting in favor of a conference call due to ‘unfinished paperwork’. The rally continued after US Retail Sales disappointed, rising by just 0.4% (vs. 0.8% cons).  Mid-session saw the US5s30s flatten as LM accounts were heard to be putting on flatteners, selling FVH and buying USH.  We also heard central banks selling USH looking to fade the rally.  TIIPs traded higher for the day and BEIs narrowed slightly but again remained in the 8bp range of recent sessions. 5y, 10y, 20y and 30y BEIs tightened by 1.7bps, 2.3bps, 2.9bps and 2.0bps respectively.  Desks note that the 30y sector has become attractive and hence expect the upcoming auction to find solid RM participation.

- US Fed Ops: The Fed is scheduled to sell $8-8.75bn in the Dec13-Mar14 sector. The largest three holdings in the SOMA portfolio in the eligible bucket are 1%Jan14s, 1.25%Feb14s and 1.25% Mar14s

- US FOMC: The Fed is scheduled to release the minutes of the FOMC meeting on Wednesday, which are likely to shed light on the prospects of additional asset purchases. The December minutes noted that “a number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee’s longer-run economic goals and policy framework.”

- Quick FX: Late yesterday (around 20.45GMT) we had another round of ‘Risk On’ as rtrs Govt. source said Greek Conservative party leader (Samaras) will deliver letter of commitment to lenders on Wednesday, contrary to earlier headlines.  Euro rallied above 131 handle

- USTs in Tokyo: comments out of China’s Zhou has rates under pressure in Tokyo, Equities in positive territory – (Bn) China Stocks Rebound After PBOC, Premier Wen Vow to Help Europe. There’s been better rate PAYing in Intermediates swaps. US 143 -18, TY 131.08 -9, FV 123.14+ -3 1/4, TU 110.07 unch, SP 1356.60 +8.90, EUR 1.3172 +55

- European Fixed Income: Bunds to open around 138.42 (-10). USTs are heavy overnight on China comments (to back European efforts) and on Greece’s Samaras, who’s promised to send written commitments today to Troika, to stand by austerity measures

- Supply: Portuguese Bill supply is the focus for the morning. At 10:30GMT Portugal will reopen the 3-month Bill and newly issue 6-month and 12-month Bills for a total of €1.5-2.0bn.

- Gilts: The BoE will conduct their third buyback of the latest round targeting the 7 to 15y sector for £1.5bn. Analysts suggest that bank will concentrate purchases on the longest bonds in the bucket. Decent offers are expected for the 3T 21 as it’s eligible for the buyback for the first time since its auction last month. Analysts also point out that the 4 22 was a popular bond to be offered in the old 10-25y bucket and expect its popularity to continue.

- Euribor & OTC: At 10:00GMT, the ECB announces its 7-Day USD allotment with $4.1bn maturing from the previous week.

- Economic Releases: At 07:00GMT, German 4Q Advanced GDP is due for release, consensus is for a q/q fall of -0.3%, to bring the y/y rate down to 1.8%.

At 09:30GMT, the UK releases the unemployment rate for December which is expected to be unchanged at 8.4%. UK weekly earnings for December are also expected to be unchanged at 1.9% as is the Claimant count rate for January at 5.0%. The UK jobless claims change for January is expected to increase to 3.0k.

At 10:00GMT, Eurozone 4Q Advanced GDP is expected to print -0.4% q/q to leave the y/y rate at 0.7%.

At 10:30GMT the Bank of England publishes its Quarterly Inflation report. Inflation for January fell to a 14 month low, having fallen steadily since hitting a high of 5.2% in September. Analysts expect the Bank to reflect a medium term outlook for lower inflation, in order back up its decision to expand QE last week by £50bn. In November the Bank had forecast that inflation to fall to 1.7% by the end of this year and 1.3% by the end of 2013.

- Speakers/Other Events:  Bank of England Governor King is scheduled to speak at a press conference at 10:30GMT following the publication of the central bank’s quarterly inflation report.

- USTs and Swaps: one supportive factor for today, some new issuance in the belly of the curve which should be swapped and keep a bid to intermediates today. Already hearing an UBS 10nc5 (px guide around 7.50% area) via UBS/BNP/CMZB/DB/Soc. We also get a Council of Europe 5yr Global deal in USDs, MS+50 area, Barcap/Daiwa/HSBC/RBC.  We’ll be watching for a Freddie Mac 3nc2 as well.

- US Fed Ops: the Fed is scheduled to purchase $4.25-$5.00bn in the 8-10y sector. Unlike in previous operations, low-coupon 3.625% Feb20s and 3.5% May20s are the cheapest two securities versus the Treasury spline, while high-coupon securities have richened recently. 8% Nov21, 3.125% May21s, and 2% Nov21s also look cheap versus the spline.

- European Fixed Income: Bunds opened higher on the Moody’s news- but the market has shrugged off the news, given the index effects are limited following the S&P move earlier in January. The only real surprise came from the move lower in Spain to the same level as Italy at A3 with neg outlook- as well as the UK rating’s watch negative (RBS downplay the effects on Gilts). Bunds high printed up at 138.66 before Asian buyers materialised in French OATs, which turned Bunds lower initially. Then came the stronger than expected ZEW- came in at +5.4 vs -11.8 expected. A few minutes later came the BTP auctions- Italy sold the top end of the 4-6bn range, with the Nov 14s seeing a good over-bidding b/c 1.404 (sold at 105.58, market traded 106.52 just prior to the deadline), while the 11/15s saw 6 ticks of over-bidding and the Feb17s 10 ticks. BTPs rallied on the follow, hitting Bunds as low as 137.89 before finding some support down there, ahead of a raft of swap’able issuance coming our way later.

Flows in futures space has been relatively muted today (only 290k Bund futures traded), while in option space, downside Bund activity has been the main theme today with one account buying 10.5k March Bund 137½/137/136½ Put Fly for 5 ticks. A week ago, this account rolled down its long put spread position from 138/137½ to 137/136½ via a put condor, and now it appears to be rolling it up via this fly. The 137 strike is equivalent to 2.03% in 10yr yields. Swaps flows have also been quiet today- but see deal pipeline below.

- ITC Euribor & OTC: The ECB allotted €142.8bn in 7d MRO & €14.3bn in 1m STRO- Allotments was in line with expectations, the system remains awash with excess liquidity and limited market impact expected.

European Swaps: deal pipeline >>

Daimler        EURbmk 3yr MS+70a    DB/LBBW/SANTANDER                   today

ING            EURbmk 10yr MS+220a  CA/DB/ING/UBS                       today

EIB            EUR1bn 8yr MS+60a    BAR/JPM/NOM                         today

KfW            EURbmk 5yr MS-7a     BAR/COM/RBC                         today

CADES          EUR250m+ tap OAT+27    C/UBS                             today