What's happening with curves? Omicron vs Inflation

The morning session has seen a distinct risk-off feel with core fixed income higher across the board let by Treasuries. Against this backdrop we have also seen French and later Eurozone HICP data, with the French data in particularly helping to slow the move higher in EGBs.

• The Treasury curve continues to bull flatten with 2-year yields down 2.4bp on the day but 10-year yields 8.1bp lower. 10-year yields are now almost 22bp lower than they were prior to Thanksgiving. The MNI Chicago PMI and Powell/Yellen's Senate testimonies will be watched later, but are likely to take a back seat to any more news on the Omicron variant.
• The German curve has also bull flattened but to a much smaller extent. Schatz yields are down 1.6bp on the day but 10-year Bund yields are 3.4bp lower. This puts 10-year Bund yields around 12bp lower than pre-Thanksgiving levels.
• Gilts have seen more of a parallel curve shift (with a flattening bias). 2-year yields are down 4.6bp on the day while 10-year yields are 5.0bp lower. 10-year gilts have split the difference between USTs and Bunds, falling around 18bp since pre-Thanksgiving levels. 2-year gilt yields have seen the biggest moves in that sector however.
• We note that 10-year Treasuries have seen the biggest moves as the Omicron variant has the ability to impact both the pace of tapering and push back rate hikes. In the UK, rate hikes have been pushed back but may ultimately still be needed given the tight labour market. While the Eurozone, the ECB were unlikely to raise rates any time soon, and the only policy impact could be to make the successor to PEPP more generous.
• Therefore, to us it makes sense that we have seen Treasuries outperform gilts which have outperformed Bunds.