US TSYS/SUPPLY: Preview 5Y Auction

• Despite the USD staging a steady recovery through much of he European session, the pessimism surrounding the greenback has returned through US trade, with the timing of the turnaround matching closely with Trump’s first Monday outburst against the Supreme Court.
• Precious metal strength remains the cleanest expression of the latest tariff uncertainty, with spot gold recently extending the Monday rally to 1.75%, briefly printing at $5,200, while spot silver is up close to 3%.
• The Japanese yen returns to being the best performer in G10, with USDJPY slipping back to 154.50 from 155.05 recovery highs. The holding of support in the low 152’s has managed to keep a bullish trend condition in place for now, with 156.29 (Feb 10 high) representing the next meaningful topside level.
• Despite JPY’s recent appreciation following the lower house election, Goldman Sachs think JPY weakness is likely to resume, especially against CHF given relative correlations and domestic inflation dynamics.
• Morgan Stanley holds a contrasting view, stating that “while geopolitical concerns are leading to broad USD strength, the strong inflows to Japan equity from offshore investors as well as less concern about Japan's fiscal situation can continue to weigh on USD/JPY, in our view.”

The aforementioned pullback from recovery highs in e-minis, linked to U.S. President Trump’s latest comments on tariffs, pushes gilt futures to fresh session highs at 92.71. Bulls remain in technical control but are still short of key resistance at the January 14 high (92.95).

• Yields 1.0-2.5bp lower, curve flatter. 10s hit the lowest level seen since late ’24 at 4.327%, next downside level of note located at 4.30%, deepening the break below medium-term trendline support that took place last week.
• Spread to Bunds ~1bp narrower, close to 160bp.
• The short bucket APF sale from the BoE saw mixed metrics (strong cover and weak pricing, see recent bullet for more there).
• SONIA futures flat to +3.0, underpinned by the move further out the curve. BoE-dated OIS still prices ~49bp of easing through year-end, failing to move beyond 50bp of pricing in early trade this week.
• Late London morning comments from BoE dove Taylor did little for markets, as he generally reaffirmed his well-defined view.

Most of the sell-side notes that we have read maintain a constructive stance for gilts, viewing last week’s tier 1 UK data as confirmatory of the overarching dovish bias surrounding the BoE.

• Goldman Sachs: UK duration found some relief last week, outperforming G3 peers. The shape of the repricing across the curve - with 10s leading the rally - points primarily to a reprieve in term premium. We see the week’s data releases as solidifying the case for BoE easing too. With the Greater Manchester by-election to be held on 26 February and local elections in May, Gilt risk premium may remain volatile. However, over the medium term, we continue to expect the macro tailwinds to Gilts to win out. And with strong carry-to-vol in the Gilt curve, we remain of the view that Gilts are a good, calculated risk.
• TD Securities: We still see yields drifting lower and ending the year around the 4.10% mark. However, the risks events call for adjusting our crowded long positions in the belly of the curve. Price action since the beginning of the year suggests that post Budget long positioning in the 30-Year sector has seen some consolidation, while longs have continued to build in the front end and belly. While reduced long-end issuance has been flagged, we see this as less fully priced into the curve. We see greater relative value in moving from the 10-Year to the 30-Year sector (taking profit in 10s and moving into 30s), or in being paid on the 5s10s30s gilt fly. Upcoming by- elections pose a risk, but we continue to see the fiscal backdrop as supportive. The richening of GBP swap spreads has been a relentless theme in January and February. A lack of near‑term cash flows suggests that the net supply turns positive in the coming months. Furthermore, we note that most issuance in January and February was driven by SSAs and bought on ASWs. Incoming issuance from financials and corporates should also weigh on spreads. As a result, we see 5-Year spreads cheapening relative to 30s.