Worst-Case Averted

The light bid in U.S. Tsys that was apparent ahead of the Xi-Biden phone call faded from extremes, with the opening salvos ahead of the call seemingly a little bit more open vs. some expectations. While the meeting itself seemingly failed to herald any meaningful progress re: Sino-U.S. relations (as was exp.), the lack of overt conflict re: matters such as Taiwan meant that the call avoided the worst-case scenario for risk assets. TYZ1 +0-05 at 130-14+, back from session highs of 130-17, as cash Tsys run flat to 2bp richer across the curve, with 10s outperfroming. Flow was headlined by a 5K screen buyer of the TYZ1 130.00 puts. Tuesday's domestic docket is retail sales-centric, with industrial production, business inventories & NAHB housing data also due. Tuesday will also bring a deluge of Fedspeak, with Bullard, Barkin, Bostic, George & Daly all set to make addresses.

• The JGB curve was subjected to some twist steepening, with the belly representing the weak point (cheapening by ~1bp) in the wake of the weakness in futures overnight. The move in futures extended during the Tokyo morning as local participants reacted to overnight developments and set up for this afternoon's 5-Year JGB supply. The auction was solid, with the low price meeting broader expectations (taken from the BBG dealer survey), while the tail width held steady when compared to the previous auction as the cover ratio moved higher, topping the 6-auction average as it hit the highest level witnessed at a 5-Year JGB auction since April. Value vs. futures and the ability to set relative value steepener plays ahead of the impending outline of the well-discussed fiscal support package (which may weigh on the super long end on an increased issuance burden) were the most likely supporting factors for takedown (outlined ahead in our preview of supply). Futures are still lower on the day, -11 ahead of the close.
• While there was little in the way of fresh meaningful substance in the RBA's November meeting minutes, some light pressure crept into the front end of the ACGB curve post-release. That likely came on the back of the sentence which noted that "while a range of outcomes for global inflation in 2022 were possible, risks to inflation forecasts were tilted to the upside." A reminder that the market has been pricing an early RBA liftoff (when compared with Bank forward guidance) for some time, which limited the move. The Bank's overview on inflation remained relatively well balanced, with the minutes reiterating the idea that "members agreed that the distribution of possible outcomes for inflation had widened." The minutes then fleshed out upside and downside scenarios for the path of inflation. YM made new session lows on the release, with the same holding true for XM, although the contracts edged away from worst levels, with a subsequent address from RBA Governor Lowe reaffirming the well-known dovish stance at the centre of the central bank. YM -5.0 & XM -6.5 at the close.