From Fox Sports' Ken Rosenthal:

The Yankees' farm system is strong enough to match up with the Padres if the teams revive their discussions on right-hander Jake Peavy. The Padres, according to one major-league source, told the Yankees that a deal would be possible even if the Yankees declined to offer right-hander Phil Hughes.

The Padres scouted Hughes in a recent Arizona Fall League game, but the Yankees have zero intention of trading him.

Via Ben.