US TSYS: Goldman Sachs: Russia/Ukraine Conflict Dominates Price Action

Alongside lower nominal yields since the start of the Russia/Ukraine war, changes in inflation and real rate mix and other markets suggest increasing concern about a negative growth shock above all else. However, we believe the growth impact, both from direct linkages and through the commodity channel, are limited, and markets do not appear to be weighing either the post-Omicron recovery or the risks of continued price pressures all that much. On the latter, Chair Powell notably cited inflation that is either higher or more persistently higher than expected as something that could elicit a more aggressive move by the Fed, suggesting that additional upside inflation surprises could see the market once again consider the risk of 50bp moves. A shift in focus away from the war would, in our view, therefore be supportive of higher yields across the curve; terminal rate pricing is now roughly 100bp below where think it will end up, and although we like locating shorts/ around mid-2023, we refrain from adding risk at the moment given the market’s current focus on adverse headlines from the conflict.”