Crude Gyrations Set The Tone In Asia

Surging crude prices triggered stagflation-related worry in early Asia-Pac dealing, supporting core global FI markets, with the greatest impact being felt in the Tsy space. Several factors fed into this dynamic; Western discussions re: banning Russian oil (although Europe’s reliance on Russian energy complicates that matter), various U.S. delegation trips to oil producers (that have already happened, and speculation surrounding those that could happen in future) in a bid to secure alternative oil supply, Libyan crude production woes, fresh Russia-related headwinds in the ongoing Iranian nuclear talks and an “ambitious” ’22 GDP growth target out of China. Crude did pare back from fresh cycle highs pretty quickly, although WTI & Brent still sit $10-11 firmer on the day. BBG source reports pointing to the potential for the U.S. to act unilateral when it comes to Russian oil sanctions weighed on bonds a little, as did news that Russia would re-open humanitarian corridors in Ukraine, to facilitate the safe passage of civilians (we will see if that takes place as scheduled at 07:00 London, and if they remain open after the notable violations from Russia on the ceasefire front over the weekend).

• TYM2 last +0-07 at 128-24, 0-12 back from session highs, operating on over 200K lots ahead of London hours. Cash Tsys run 1-4bp richer on the day, with the 5- to 7-Year zone of the curve leading, while 20s lag. Note that EDH2 continues to underperform on the strip, with the contract last -1.0 on the day, albeit comfortably off early session lows. A reminder that the contract moved to the lowest levels observed since Q120 last week, even as fear re: the Russia-Ukraine conflict intensified, with some signs of worry re: funding evident in the STIR space (FRA/OIS and EUR/USD x-ccy basis at the fore). The remainder of the whites and reds trade 1.5-7.0bp firmer, a little shy of best levels, with the already outlined risk-off/stagflation dynamic supporting there. There isn’t anything of any real note on the U.S. docket on Monday, with the Fed now in its pre-meeting blackout period.
• JGB futures followed the wider impulse, given Japan’s reliance on energy imports. That left JGB futures +20 at the bell, a touch shy of best levels. Cash JGBs run 2-3bp richer across the curve, with 7s leading, as futures aid that zone of the curve’s outperformance.
• The bid in Aussie bonds lagged what we saw seen in U.S. Tsys. Could it be a case of liquidity/safe haven preference? Maybe, but it could also be what seems to be less worry re: stagflation in Australia, even as oil prices surge, given the relatively sanguine existing view on inflation (for instance, the IR strip was 2-4 ticks lower through the reds, while Eurodollars rallied, in the main). YM was unch. & XM +1.5 at the bell as a result. Note that the AU/U.S. 10-Year yield spread has moved out above 40bp. We have noted on several occasions that we are now in a zone that has generated cross-market tightener interest in recent times (and there were signs that such a dynamic began to show last week), although the heightened market uncertainty/vol. may make participants a little more reluctant to pursue such moves at present.