Waller Looking At Potential 50bp Hike, Ukraine Worry Still Elevated

Overnight headline flow was dominated by Fed Governor Waller noting that he would be open to a 50bp rate increase in March if the incoming data continues to point to an exceedingly hot economy, while he followed St Louis Fed President Bullard (his former boss) in pointing to the need for 100bp of hikes by mid-year. Waller also noted that it is far too early to accurately assess the risk posed by the situation in Ukraine, while pointing to a potential moderation in tightening requirements if related downside risks developed. FOMC dated OIS now prices in 31.5bp of tightening for March, ticking higher overnight, but operating well within the recent range. Elsewhere, worry re: Russian advances towards the Ukrainian capital of Kyiv remained evident, offsetting some of the downward pressure. TYH2 -0-02 at 126-13 into European hours (note that OI has moved into TYM2 ahead of Monday’s first notice). Cash Tsy trade has seen some twist flattening, reflecting the balance between Fed pricing and worry re: Ukraine outlined above, with the major benchmarks running 2.5bp cheaper to 1.5bp richer. Liquidity has deteriorated in both futures and cash trading. Looking to the NY docket, we will get the latest round of PCE readings, durable goods data, pending home sales & UoM sentiment survey will all cross.

• The overnight impulse generally weighed on JGBs during Tokyo dealing, with futures ending -21, extending on overnight losses. Meanwhile, cash JGBs were little changed to 3.5bp cheaper, twist steepening. Payside swap flows also weighed on the space, as most swap spreads widened (super long swaps rates were 3.5-4.5bp higher on the day). A strong 2-Year JGB auction supported paper out to 10s during early afternoon dealing, but the move was very limited, and faded.
• Aussie bond futures looked lower in early Sydney dealing, extending on overnight losses, before following the broader ebb & flow of the session. That left YM -5.0 and XM -7.5 come the bell. The long end didn’t show anything in the way of material weakness after the AOFM noted that it will auction A$300mn of ACGB Jun-51 paper next week, with the 7- to 12-Year sector underperforming on the day.