Morgan Stanley Fixed-Global Macro Commentary February 20-106606099.pdf

MUpdate2MovesacrossUSTreasuriesweremuchlesspronouncedthanCanadianequivalentsastheUSTcurveonlymildlytwist-steepened.Long-endunderperformancewasamainstay,withhigh-gradecorporateissuanceaprominentfocusthisweek.Front-endChinesegovernmentbondyieldsfellafterthePBoCcutthe5yLoanPrimeRateby25bp,to3.95%,thelargestreductiononrecord,aspartofthestockmarketandhousingstabilizationefforts.ApartfrombroadCADweakness,theothermainunderperformerintheG10wastheUSdollar(DXYUSDIndex:-0.2%),whichusheredUSD/CAD(+0.3%)abovethe1.350level.NOKweaknesscameamidstamovelowerinBrentcrudeoil(-1.5%)futuresprices,to~$82/bbl.Despitethelethargicbackdropforriskdemand,SEK(+0.4%)wasthetopperformerintheG10,alongwithEUR(+0.3%),amidremarksfromRiksbankpolicymakers,whichtiltedhawkishly.ConsolidationintheUSequitymarketcontinuedaheadofearningsfortheartificialintelligencebellwether,post-marketcloseonWednesday.Inthedefensivetape,theonlyS&P500(-0.60%)sectortofinishinthegreenwasConsumerStaples.CyclicalsstocksunderperformedinthebroaddistributionacrosstheRussell2000(-1.41%).Japan:JGBsinitiallybear-steepenedaheadofthe20yJGBauction.However,withoutaspecificbuyerbaseforthe20ytenor,marketparticipantswereconcernedaboutcapacitytoabsorbJPY1.0trofsupply.However,theauctionwasstrongerthanexpected,withatailyieldat1.513%(C:1.523%).Theremayhavebeensomerebalancingactivityfromequitytobonds.Withoutanylong-endsupplyuntilthe30yJGBauctiononMarch7,marketparticipantsquicklysquaredshortpositions,andlong-endJGBsralliedsignificantly;20yJGBsralliedby2.0bpd/dto1.485%onasimpleyieldbasis.Short-to-mediumtermJGBslaggedasUSD/JPYtradedabove150;5yJGBssoldoffby0.5bpd/dto0.355%.JanuaryJSDAdatasuggestedJapanesemarketparticipantsstillhadawait-and-seeapproachaboutJGBpurchases.ThiscouldsuggesttheymayfullyparticipateindurationoncetheBoJnormalizespolicy.TONAOIStwistflattenedalongsideJGBs.XCCYbasistightenedacrossthecurve.GiventhenationalholidayintheUSovernightonMonday,activityintheFXmarketremainedmutedonTuesday.DuringTokyotradinghours,USD/JPYgroundhighertoward150.40whileotherCCY/JPYpairstradedrangebound.ThesituationchangedfromtheLondonmorningasbroadUSDweaknessbuoyedEURandEUR/JPYbrokeabove162.OtherCCY/JPYpairsalsogroundhigherdespitetherallyinglobalrates.IntheNYsession,adownsidesurpriseinCanadianinflationweighedonCADandCAD/JPYfellbelow111.USD/JPYalsosoldoffbelow150.Europe:SEK(+0.4%)gainedagainsttheUSdollar,despiteasell-offinriskassets,adivergencefromitsusualrelationship.AportionofSEKstrengthwasdrivenbyremarksfromRiksbankpolicymakers,whichtiltedhawkishly.NOKendedflatagainsttheUSdollar,duetoitsrelativelyheightenedsensitivitytocrudeoilprices,whichsoldoffduringtheLondonsession.ThefocusoftheLondonsessionwasontheECBindicatorfornegotiatedwages,MUpdateMorganStanleyResearch3whichfellto4.5%y/yin4Q23(P:4.7%),butthisultimatelyhadlittleimpactonduration.IntheLondonafternoon,Europeancurvesbull-steepenedalongsideUSTreasuries.10yBundyieldsclosed4bplower,at2.37%,and10s30ssteepenedby0.5bpinGermany.Asell-offinWTIandBrentcrudeoilsentinflationfixingslowerby1-2bp,aswel