Risk off has gained momentum since mid-morning in Europe, with market focusing on new reports concerning the rift between the US and China, specifically Reuters exclusives that China effectively sought to “backtrack on nearly all aspects of US trade deal.” An otherwise lackluster if not slightly positive risk evening now bears closer watching as US equity futures tick lower in general risk-off trade. As of 8 AM ET, Treasuries were 1.5 to 2.5 bps lower in yield, in a small steepener, while US equity futures were down roughly .5% ahead of the cash open.

The Asian session saw a better risk on bid after local equities repriced to account for yesterday’s performance in the US. The RBNZ delivered its expected rate cut of 25 bps to all-time low 1.5%, Chinese risk markets bounced (A50 index futures specifically) even as Chinese trade balance for April shrunk (exports dropped 2.7% while imports were up 4%), and NASDAQ futures led US index futures higher. Flows saw small Japanese real money selling in 10s early in the Asian session, offset by deal-related corporate buying in 5s and 30s. Around Tokyo lunch, Asian central banks aggressively sold a healthy dose of US 5s and 7s, along with smaller size sales in 10s; that trade continued through the European open. Japanese real money again sold Treasuries, but this time in 10s, through the Asian open as well, while better paying interest was seen by Asian banks in USD 5y sector and RV accounts looked to add spread wideners in USD 2y sector. There was some Asian asset manager buying of TY calls for June (16 days) and July (44 days) expiries, struck 15-20 bps out of the money. Locally, JGBs traded sideways for most of the session, with decent results in the JGB 10y TAP having no impact on the trade. Aussie 10s rallied on the RBNZ rate cut, but fell back with Kiwi rates after the statement was not as dovish as some had expected (statement tempers any hope anything more than one additional rate cut to 1.25% this summer). Asian equities closed down between 1.2 and 1.8% across the board, although Chinese shares held up better.

The European session opened to better early selling and some decent buying in bund puts (RXN specifically) that kept pressure on rate markets early; there was also deal-related paying in EUR 5y swaps along with RV and dealer selling for concessions in bobl ahead of supply there. A surprisingly strong German IP number put more pressure on bunds, along with Treasuries and gilts. Peripherals were the flavor of the day as very good buying materialized in in SPGBs that helped tighten rest of peripherals (well, okay, save Italy that we really don’t have time to talk about right now, as they widen by 7 bps to bunds; that’s the next problem in a couple weeks). The big event was written confirmation of the whisper from yesterday: namely, Reuters exclusive at 5 AM ET said China had come back to the US and backtracked on virtually every aspect of the deal agreed to by negotiators over the last three months, especially on intellectual property and trade secrets. That was it, as highlighted by emini futures going from +5 pts (and +9 on the highs an hour earlier) to down 15 handles. Treasuries saw good levered buying of TY and FV contracts, with European real money lifting buxl and US classics. The bobl auction was okay (average bidding, okay results), given the events that overshadowed the supply, while Portugal issued 10y and 15y notes to strong overbidding and decent pricing. UK had to add to the risk off sentiment on stories that May is not getting any traction on a deal, as cable makes a break toward 1.3 (1.3009 at 8 AM ET).

We will spend most of today watching tape, as today’s data calendar is bare. No one cares about the only release of the day, MBA Mortgage Apps that printed at 7 AM. At least we get PPI tomorrow. Good news is we will get $27BN new 10y notes at 1 PM ET today in the second round of the quarterly refunding, while only Brainard is scheduled to speak today (8:30 AM ET, opening remarks at a “Fed Listens” event). I have no comment on Trump’s thoughts on that subject.

Well, well, well, what tangled web have you wrought this time my friends???? So for choice today, let’s call the range in TYM at 124-10 to 123-30, with early risk that we try to run through resistance at 124-05+/06 (high o/n) and make a break through pivot resistance at 124-10 to trade 124-15, that would bring us a test of 2.37% in cash 10s. Above there resistance comes in at 124-23+. Below 123-30, support comes in at 123-24/23+, 123-19 (with a trade gap down to 123-15), and 123-05. Still like the idea of hedging/playing in front end/belly as have to think 5y sector continues to perform in a rally. Want to say buy synthetic call structures in very short-dated 5y tail or equivalents, so thinking FVM 115.25 puts (trading 115-24 currently in FVM9) with 20% delta, looking to overhedge a bit and juice the bullish view. There’s only 4/64 of premium to give away if vol “gets smoked” on a bear flattener back up. More than happy to discuss further if you wish….

Have a great morning,
mjc