Powell Flags Omicron Risks

TYH2 around late NY levels, +0-07 at 130-16.

• The early Monday pressure that stemmed from participants seemingly being more at ease with the ultimate risks posed by the Omicron COVID variant waned as we moved through the session, with the curve twist steepening on the day come the close. Buying in the 5- to 10-Year zone of the curve on the part of real money a/c’s and central banks (per desks), in addition to FV block buys (accounting for a little over a cumulative 21K lots) aided the recovery from cheaps. The bid came back in even as equities rallied. Cash Tsys out to 5s richened by 1-2bp, while the longer end of the curve cheapened by ~3.5bp on the session, finishing comfortably off of early NY cheaps.
• Late NY hours saw Fed Chair Powell point to the risks provided by Omicron re: the economy and inflation, including downside risks to progress in the labour market. Powell did not comment directly on the pace of Fed tapering in the pre-release ahead of his testimony on the Hill due Tuesday. A lack of any explicit pushback re: Omicron worry allowed Tsys to firm into the bell. Z2 Fed Fund futures price ~45bp of tightening at typing, ~20bp off last week’s hawkish extremes. Tsy Sec Yellen will join Powell on the Hill, with her own pre-released remarks pointing to continued confidence in the U.S. economic recovery “at this point,” alongside a reiteration of the need to raise the debt limit.
• Official PMI data out of China headlines the broader economic docket during Asia-Pac hours. Looking ahead to Tuesday’s NY session, MNI Chicago PMI, consumer confidence and house price data will all hit, in addition to the previously flagged address on the Hill from Powell & Yellen. We will also hear from Fed’s Williams & Clarida.