CHINA RATES: China Repo Rates Diverge on Wednesday

Goldman Sachs note that “April core CPI rose by the fastest pace since January and was two-tenths above consensus expectations. The report saw strength in not only reopening categories, but underlying core services and core goods prices as well. While the last few upside inflation surprises resulted in higher longer-dated real yields on the view that the Fed may need to deliver more tightening, this past week’s release produced the opposite effect - real yields fell sharply across the curve. The different market response likely reflects heightened concerns about decelerating growth (as seen in the downdraft in both equities and breakevens) and the Fed’s ability to continue tightening into a potential slowdown. However, we expect this decline in real yields to reverse. In our baseline economic view where recession is avoided and inflation begins to normalize, we see 5y5y real yields as having another 25-50bp of upside from current levels, to between 75-100bp in level terms, and 10y real yields at 60-70bp by year-end. In a high inflation scenario, we would expect the Fed would likely need to raise the policy rate above 4%, which would argue for even higher intermediate real yields than our baseline. We expect this drift higher in real yields to occur as we move through the year, and investors reduce their perceptions of near-term recession odds. Of course, if recession fears are indeed realized, real yields could end up materially lower, reflecting two-sided risks.”

TYM2 has had a brief look below its early Asia & Friday trough, showing as low as 119-01+ in the process, although the move remains limited at present, with the contract off lows, last dealing at 119-03. Do note that the S&P 500 e-mini also looked through its early Asia-Pac high before backing off from best levels (a little ahead of the move in TYM2). Cash Tsys sit ~3bp cheaper across the curve, with 10+-Year swap spreads running 0.3-0.6bp wider, pointing to the potential for longer dated payside swap flow having a hand in the cheapening observed in the Tsy space during early Asia dealing. TY-WN invoice spreads have widened by a similar amount to their corresponding swap spreads. China matters remain front and centre thus far.