TYH2 Through Thursday’s High

TYH2 through yesterday’s high at the re-open, +0-04 at 126-17+. Fedspeak from Mester (’22 voter, hawk) has flagged that Ukraine tensions are amongst the risks that the economy faces at present but has stuck to her hawkish script in the main, offering little new on her thought process.

• To recap, false flag worry centring on the back-and-forth accusations of Ukraine/separatist shelling in the separatist Luhansk region of Ukraine underpinned Tsys on Thursday, with reports of intensified shelling once again doing the rounds later in the day. There was a pullback in the risk-off price action during late Asia/early European trade, as the validity of the Russian sources providing the initial reports was questioned, with the defensive tone then reasserting itself as we moved through NY dealing. Continued western doubt re: Russian claims of a partial military pullback also fed into the risk-off narrative. U.S. President Bien & Secretary of State Blinken reinforced their view that a Russian invasion of Ukraine could take place in the coming days, with Blinken opening the way for another meeting with Russian counterpart Lavrov.
• Longer dated breakevens fell sharply on the back of the latest 30-Year TIPS auction, which experienced a tail of over 6bp.
• Cash Tsys richened by 5-8bp on the day, with the belly of the curve leading the bid. TYH2 tested Asia-Pac highs on a couple of occasions but failed to break above, going out a touch shy of best levels of the day.
• Note that some of the more hawkish market pricing points re: the Fed continue to pare back e.g. dated OIS now prices in 35bp of tightening at the March FOMC (after briefly hitting 50bp post-CPI & Bullard on Thursday of last week). Meanwhile, December FOMC dated OIS is pricing in just under 160bp of tightening, back from the 180bp printed last Thursday.
• There is a lack of tier one risk on the Asia-Pac docket on Friday. Meanwhile, Friday’s NY docket will see the release of existing home sales data, as well as Fedspeak from Brainard, Waller, Williams & Evans (Evans is a ’23 voter, while the remainder hold permanent voting status).