Ticking Higher Into European Hours

Fresh cycle highs for crude oil futures (Brent printed above $111.00) applied pressure to U.S. Tsys in early Asia dealing, although the space has since recovered from session cheaps. The move away from lows came as crude futures moved off their peak (although WTI & Brent are still ~$5/bbl firmer on the session), while reports of Russian troops entering Kharkiv through the air did the rounds (with Ukraine pointing to an attack on a hospital). U.S. President Biden’s assertions re: Russia e.g. “Putin will pay a high price over the long run,” had a limited impact on wider price action. Biden also tried to assure the U.S. public that he will do everything he can to combat inflation, in what was his first State of the Union address. We have also seen Russian banks start to wind up some of their European entities. TYM2 tapped best levels of 128-21 in recent trade (a shade below Tuesday’s settlement), moving to fresh session highs into European hours (aided by a 3K block buy in the contract). Cash Tsys run 2.5bp richer to 1.0bp cheaper, twist steepening. Note that FOMC dated OIS now prices ~23bp of tightening at the Fed’s March meeting i.e. a 25bp hike is not fully priced in, while ~118bp of tightening is priced in for calendar ’22 i.e. less than 5x 25bp rate hikes.

• To recap, the smell of stagflation was in the air on Tuesday, with Tsys bid, oil punching higher and worry surrounding Russian military advances into Ukraine evident. A bid in the EGB space helped Tsys pare Asia-Pac cheapening ahead of NY hours. Short positioning was another likely factor playing into the richening. Cash Tsys finished 5-13bp richer on the day, with the belly leading and 20s lagging (note that several sell-side relative value plays involving long 20s on fly structures were stopped out on the move, adding another positioning dimension to Tuesday’s move).
• ADP employment data headlines the economic release docket during NY hours (ahead of Friday’s NFP reading, cue discussions/debate re: correlation between the two), with Fedspeak from Powell (day 1 of his testimony on the Hill), Bullard & Evans, as well as commentary from NY Fed’s Logan (on asset purchases), also due.