US TSYS: Tsys Yields Cheaper, Potential Tariff Exemptions

In post-Tokyo trade, JGB futures closed slightly weaker, -4 compared to settlement levels, after US tsys bear-flattened, with US yields finishing flat to 5bps higher. 

• Markets reacted positively midmorning to headlines that Pres Trump agreed to delay a 25% tariff on Mexico, with equities paring losses.
• FX markets have been extremely volatile Monday, with the initial likely implementation of tariffs prompting a broad strengthening of the greenback, and particular pressure on the Mexican peso and the Canadian dollar. Despite the headlines being Mexico-centric, similar price action saw USDCAD almost reverse the gap to last Friday’s close.
• After the US market close, Canadian PM Trudeau wrote on X.co that US tariffs on Canada due to be imposed overnight will be "paused for at least 30 days" pending further discussions. Tariff negotiations with China are ongoing.
• This week’s US data highlights are CPI, PPI and the January employment report on Friday.
• Japan's Economy Minister Ryosei Akazawa said on Monday the country's underlying inflation was approaching 2%, a goal that is included in the government's joint statement with the central bank aimed at coordinating policy to beat economic stagnation. (per RTRS)
• Today, the local calendar will see Monetary Base data alongside 10-year supply.

European natural gas prices rose 1.2% to EUR 53.85 to be over 10% higher this year on tariff worries. They fell to EUR 52.79 in early trading and then range traded after recovering. Storage levels at around 53% continue to worry the market especially as cold weather is likely to continue this week. 

• Since Russia’s invasion of Ukraine, Europe has had to compete for global supplies of LNG. Asia has had a mild winter but it is now forecast to turn colder, especially in Japan, increasing its demand for heating. This could see European destocking continuing at a faster than usual pace adding further summer refilling pressures.
• Europe has already proposed increasing imports of US LNG to avoid trade taxes. There are concerns that a trade war between the two would risk LNG supplies though. On Monday President Trump said he’d “definitely” impose tariffs on European imports, while the EU said it would respond.
• US natural gas rose 8.7% on Monday to $3.31 boosted by forecasts for colder weather for the northern US in February, according to Commodity Weather Group. The market ignored the tariff news that rattled other assets.
• Bloomberg notes that the spread between the March and April contracts turned positive signalling that the market is expected to be tighter at the end of winter.  

• Tsys futures closed mixed on Monday, curves twist-flattened with front-end yields cheaper fueled by inflationary risk from tariffs and a risk-off bid coming into the long-end on growth concerns, while projected rate hike pricing through mid-year cooled. Large swings occurred following headlines Trump will delay tariffs on Mexico, while later in the session he announced tariffs will be delayed on Canada. TU closed -01¾ at 102-24¼, while TY closed +03+ at 108-30+
• There was a large bullish tsys options trade with expectations for a 10yr yield drop below 4% by Feb. 14. A trader bought 43,213 US 10-year Week 2 112.75 calls, with the strike implying a yield of ~3.95%. The $675,000 premium indicates a fresh bet on a bond rally. There was also a week 1 US bond put trade which targeted the 30yr yield rising to about 4.88% ahead of Wednesday's expiry.
• Cash tsys yields closed higher across all tenors with the 2yr +5.2bps at 4.249%, while the 10yr closed +1.6bps at 4.555%. The outperformance by long-end yields saw the 2s10s, 5s30s drop 5.5bps and 4bps.
• The fed's Goolsbee cautioned that the Fed should slow the pace of rate cuts due to rising uncertainty, particularly from Trump’s newly announced tariffs on Mexico, Canada, and China. While tariffs on Mexico and Canada have been postponed, Goolsbee highlighted the challenge of distinguishing between economic overheating and temporary trade-related effects. His comments align with Atlanta Fed’s Bostic and Boston Fed’s Collins, who also advocate a patient approach after 100bps of cuts in late 2024.
• Today we have Factory Orders & Durable Goods Orders