FI Markets Potentially Reflecting Less Malign Omicron Scenario

Having initially firmed around the open, EGBs soon sold off alongside a sharp move lower in gilts.

• Catalysts for price action are thin on the ground given the lack of tier one economic data, European supply and an absence of central bank speakers.
• Covid headlines remain a key driver for markets. While the US and some European countries have recorded record high daily cases, the scientific consensus seems to be converging on the prospect of the Omicron variant being less deadly than initially feared. Fixed income markets are arguably reflecting an improvement in risk sentiment at the margin.
• Gilts are underperforming EGBs with cash yields 4-5bp higher on the day.
• The bund curve has bear steepened with the 2s30s spread widening 3bp.
• The OAT curve has steepened more sharply on the back of the very short-end trading bid and longer-end yields pushing higher. The 2s30s spread has traded up 6bp.
• BTP yields are almost uniformly 3bp higher across the curve.