Broader Risk Recovery Outweighs Geopol Worry, Short-End ACGBs Go Offered On RBA Repricing

Core bond markets briefly showed some strength, which may have been linked to further complications on the geopolitical front. With tensions surrounding Russia's military activity near the Ukrainian border simmering in the background, North Korea hinted that it might resume testing intercontinental ballistic missiles (ICBM) and nuclear weapons. Core FI space gradually lost shine later into the session, as Asia Pac equity markets and U.S. e-mini futures crept higher.

• T-Notes rose to a session high of 127-20 before trimming gains and stabilising. TYH2 last trades -0-06+ at 127-15. Eurodollar futures trade 0.5-5.0 ticks lower through the reds. Bull flattening remains evident in U.S. Tsy curve, while yields have trimmed losses and last sit just 0.2-1.2bp lower. Weekly jobless claims, existing home sales & Philadelphia Fed Business Outlook take focus on the data front, with a 10-year Tsy auction also up today.
• Selling pressure hit short-end ACGBs after the release of strong Australian jobs data, which fanned expectations of an earlier withdrawal of stimulus by the RBA. The unemployment rate fell to a 13-year low of 4.2% in December from 4.6% prior, undershooting the median estimate of 4.5%. While the ABS highlighted that the survey was taken before a sharp spike in Covid-19 cases, the report fell on a fertile ground, as Westpac had earlier front-loaded their RBA rate-hike call. Although a subsequent spell of demand for core FI brought some reprieve to ACGBs, they resumed losses amid further hawkish RBA repricing. YM trades -3.0 as we type, with XM unch. at typing. Bills run +1 to -4 ticks through the reds. The weakness in short-end ACGBs drives flattening in cash curve, with yields last seen unch. to +3.2bp & 3-Year ACGBs taking the biggest hit. A note from Goldman Sachs may have added fuel to short-end ACGB sales, as they now expect the RBA to scrap new QE purchases this coming Feb (previously this May) and start raising the cash rate in May 2023 (previously Nov 2023).
• JGB futures posted a leg lower upon the re-opening of Tokyo markets. They staged a recovery attempt on the back of the aforementioned bid in core FI, but lost ground into the lunch break and after. JBH2 last trades at 150.88, 4 ticks below previous settlement. Cash JGB curve runs slightly steeper, as the super long end underperforms.