Bull Steepening In Asia

Tsy Futures have pulled back from best levels, with crude oil futures also back from their fresh multi-year highs (crude still prints ~$4/bbl firmer on the day), after showing higher in early Asia trade. Cash Tsys run 1-4.5bp richer on the day, bull steepening, while TYM2 hovers around the middle of its overnight range, last +0-05 at 127-14. It was difficult to ascertain an outright driver of price action when it came to the early Asia bid in the space, perhaps worry re: stagflation risk as oil surged again, perhaps some post-Powell short cover in thin liquidity. Headline flow was light in Asia, with markets remaining on the lookout for any developments surrounding the Ukraine-Russia conflict (note the latest meeting between delegations from the two countries is due to take place on Thursday).

• To recap, cash Tsys were 14-17bp cheaper on Wednesday, bear flattening, unwinding all of Tuesday’s richening, and more. Fed Chair Powell backed a 25bp increase at the March FOMC meeting, while he noted that he was open to deploying 50bp rate hikes moving forwards, if inflation doesn’t cool. He also pointed to a series of rathe hikes. Elsewhere, equity markets found a bit of a base during European hours, before rallying (SPX +~1.9% at the close), while higher oil prices also applied pressure to bonds (although the relationship isn’t 100% clear cut there, as the market narrative flicks between inflation/stagflation, dependent on the broader news backdrop). Note that some have turned a little more optimistic re: the potential for a ceasefire agreement in Ukraine, with the latest round of Russia-Ukraine discussions to take place on Thursday, in Belarus.
• Powell’s hat tip to the potential for 50bp hikes down the line allowed some rate hike premium to be rebuilt in the OIS strip, with Dec ’22 FOMC dated OIS rebounding to price ~145bp of tightening, after dropping below 125bp of tightening on Tuesday. This pressured the Eurodollar strip, with EDH2/Z2 steepening by over 20bp on the day. STIR flow was headlined by a flurry of option activity in EDZ2 puts (over 100K on block), with wider put activity fairly active on the day.
• Looking ahead, the NY docket will be headlined by the ISM services PMI print, with weekly jobless claims data, Challenger job cuts, factory orders and final durable goods readings also due. On the Fedspeak front, Chair Powell will appear on the Hill again, while NY Fed President Williams and Richmond Fed President Barkin (’24 voter) will also speak.