There was a whiff of risk aversion as market participants digest the escalation (Ukraine reportedly launched US-made missiles into Russia for the first time) in the ongoing Ukraine-Russia conflict. The kneejerk bid for haven assets was strong, with 10Y UST yields down by as much as 7bps on an intraday basis. However, much of this faded by the close with 10Y yields down by barely 2bps for the day. 2Y UST yields, which are more sensitive to Fed expectations, closed the day largely unchanged. Meanwhile, German Bunds performed similarly, but there is a stronger lingering haven bid across the curve. With US stock indices also holding steady, investors appear willing to shrug off this geopolitical risk for now and still see the conflict as a localised issue. Investors may also recall that the start of the Ukraine-Russia war in February 2022 also did not have a lasting impact on the markets. DM yields did dip for a couple of weeks, then pushed sharply higher over the course of the year as economic considerations / aggressive Fed tightening took centre stage.
From a rates perspective, we think that the front of the USD curve is likely to be fairly stable. It does not seem likely that the Fed would react to geopolitical tensions especially if there is no material impact on inflation expectations. More weight should be put on firm economic data and the increasing likelihood that the Fed may have to slow the rate cut path even more in 2025. Mid-to-long dated USTs would be a more suitable area to express risk-off trades, with the curve more likely to flatten under moderate market stresses. From our end, we prefer to fade the market if the curve gets too flat (2Y/10Y closer to par).
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