Markets are biding time, slightly better to risk before today’s big events: ADP at 8:15 AM ET, followed by composition of this quarter’s refunding after Treasury slightly surprised market with big upside number on borrowing needs Monday, even though it was largely because they assumed another stimulus package. There is talk of a deal on the next stimulus bill that is incrementally adding to the risk bid as well. Overall though, it has been a fairly quiet evening ahead of the US open; as of 8 AM ET, Treasuries are bear steepening, .5 to 3.5 bps higher in yield while US equity index futures are up about .5% ahead of the cash open.

Treasuries saw small profit taking by CTA accounts in TY and FV contracts on the open in Asia, followed by better Japanese real money receiving in USD 5y and 7y swaps late morning in Tokyo, after the yen rallied back to the middle of the 105-handle yesterday. RV accounts sold 10s outright and on the curve against 5s ahead of today’s announcement, helping the USD curve to steepen during Asia, a theme it never surrendered throughout the night. Treasuries traded straight sideways basically straddling their 3 PM marks from Tokyo lunch until European open. Better earnings in Europe seemed to negate soft final PMI data in France and Germany, and induced further bid to risk in US equity index futures. There was a USD swap 10s15s flattener that caught the market’s attention mid-morning, as hedge funds look for ways to short 10y and 30y spots on the curve. Sellers of 15K TYV 141.5 calls (at 5:10 AM ET for 14/64) and 5K TYV 141 calls (at 5:10 AM ET for 20/64) pressured US rates mid-morning in Europe, as the paucity of activity made the trades outsized, keeping bear steepener pressure on Treasuries.

In local markets, BoJ and RBA both commenced with further buying programs, the BoJ continuation of activity but the RBA disappointing as the resumption of buying wasn’t as large as market had hoped. AOFM 2030 TAP was softly attended although well bid, as traders were preoccupied with the buyback. Aussie rates saw 10s jump 1.5 bps in yield, with the curve steepening, while JGB 10s were .5 bps lower and New Zealand yields were marked .5 bps higher. NIKKEI was down small (.25%) but rest of Asia was marginally firmer for equities.

Bunds opened softer ahead of bobl supply and on the back of early better corporate earnings for the second day running. Soft German final PMI number gave bunds a very small lift, but that faded quickly as stocks ignored the data. EU peripherals interestingly are trailing the risk move, basically flat the bunds here. There has been buying of bunds against US 10s by macro accounts since just before NY arrived, outright bank selling of bunds, RV selling of bobls, but real money buying of Italy and Spain long end. German bobl auction was fine, no tail and slightly higher bid to cover, but market continued lower after the results. Gilts trade flat to slightly weaker ahead of tomorrow’s “in play” BoE meeting, with steepening pressure being the theme in the UK as well. Better dealer buying in fronts to sell 10y and 30y gilts, with negative rate watch on high alert ahead of tomorrow. It’s all about protecting oneself in UK today. Meanwhile, UK issuance in 10y and an 8/48 Linker were both poor at best, adding more to the steepening sentiment.

Sooooo, ADP at 8:15 AM ET, Trade data at 8:30, Final July Markit PMI at 9:45, and ISM service index at 10 AM. Of course, also at 8:30 AM ET, we get the quarterly refunding announcement. People talked about this all last week (it was painful!), and then Monday Treasury surprised slightly with a higher quarterly borrowing need number. So I guess today’s release is in play. Far as I can tell, market expects $3BN more in 10s and 30s to be auctioned next week, slightly less of an increase in 3s that don’t fit the profile of “extending Treasury’s duration.” We will see. Also will get some guidance on 2s, 5s, 7s, and 20s, along with possible announcement of 1y FRN tied to SOFR (oh joy). Lastly, at 5 PM ET today, Mester will speak virtually on the economic outlook.

Well, market did a pretty good job by the bulls yesterday and satisfied a few objectives in the process. Since we have been talking about it all week, will let you know that on yesterday’s rally, open interest increased in FV, TY, US and WN, and a rather healthy increase in TY (42K). Nothing is easy around here, that’s for sure. Given the move yesterday and the new highs for the move, guessing you have to endure a little pullback here, with evidence beginning to say that the 20 bps move by next Thursday will be to lower yields, but that is still not conclusive and the next 55 hours will have a lot to say about that. I think tomorrow will present an opportunity to put on a very cheap conditional, that is conditional upon the refunding sizes being in line with Street estimates.

For choice today in TYU, call the range 140-17+ to 140-00, after an overnight range of 140-13 to 140-05+. Think risk is downside early but could see upside trade after everything is out of the way as yen looks ripe to move against greenback again. Resistance comes in above here at the objective of 140-17+, 140-21, 140-24+, 140-30, 141-04; support comes in at 140-03+, 140-00 objective, 139-28, 139-26/24+, 139-19+, 139-11+, 139-07.

Have a good hump day,
mjc