U.S. Tsys Pressured, JGBs Firm

T-Notes pulled lower at the re-open, moving further away from Friday’s NY. News out of South Africa re: the omicron COVID variant remains mixed, although the severity of the COVID strain appears to remain a little more limited than some had feared (at least from a mortality perspective). Meanwhile, over in the U.S., Dr Fauci pointed to “encouraging” early signs, with booster jabs potentially offering a “considerable degree” of protection vs. the strain, although he cautioned against drawing hasty conclusions. This cautious degree of optimism pressured T-Notes early this week, with second round effects coming from an uptick in crude oil prices. Increased speculation re: the chances of a fairly imminent RRR cut from the PBoC (in lieu of Friday’s Guidance from Chinese Premier Li) helped the space find a bit of a base early on, before a 6K FV block sale and selling flow in TY futures in the same window applied fresh pressure to the space. TYH2 -0-14 at 131-00+, 0-01 off lows, Tsys run 3.0-4.0bp cheaper across the curve, with the 7- to 10-Year zone leading the weakness. From a technical perspective, cash 10s have respected uptrend support (in yield terms) drawn off the Aug ’20 lows, bouncing from that particular area of support on Friday. There is nothing of note on the domestic docket on Monday.

• JGB futures hit the bell 14 ticks above Friday’s settlement, hovering around late overnight levels for the duration of the Tokyo session, insulated from the broader cheapening pressures that kicked into wider core global fixed income markets. Cash JGBs see outperformance for 7s, which richened by a little over 2bp during the morning (pointing to a futures-driven bid), while the remainder of the curve was flat to ~1bp richer. Domestic news flow remains relatively light, outside of speculation in the local press re: the potential for an upgrade in the government’s view on economic growth covering FY22, owing to the impact of its well-documented fiscal spending package. Elsewhere, PM Kishida pointed to a willingness to provide the required support if the omicron outbreak depends/poses a threat to the economy.
• The weakness in U.S. Tsys allowed Aussie bond futures to unwind the overnight/early bull flattening impetus, leaving YM & XM +3.0 come the bell. The collateral scarcity/RBA SLF borrowing story that we flagged in our auction preview resulted in the strong pricing at the latest ACGB Nov-24 auction, with the weighted average yield printing 1.37bp through prevailing mids (per Yieldbroker), while the cover ratio wasn’t anything out of the ordinary, printing comfortably on the 3x handle. Overall, it was another smooth auction for the AOFM. Elsewhere, the weekend saw Treasurer Frydenberg point to an upgrade in the government’s growth outlook in the upcoming mid-year budget update. This comes as no real surprise in the wake of the firmer than expected Q3 GDP data, which provides a better starting point for the economy. On the COVID front, we saw that Australia’s Queensland state will re-open its borders to the rest of the country ahead of schedule (next Monday) owing to vaccination progress within the state.