a few quick notes on Friday as fear rules ahead of month end…. (Friday)


“No reprieve Friday” brings us another risk off session, driven greatly by headlines out of Asian countries last evening. The pain theme continues with global risk indices under pressure and global bond markets bull steepening aggressively. Volume during Asia tailed as exhaustion seemingly set in, but volume picked up markedly in the fear trade known as the European session today. As of 9 AM ET, Treasuries are 7-13 bps higher in a major bull steepener while US equity index futures are now down over 2% 30 minutes before the cash open.

Japan declaring a soft state of emergency and requesting that people remain indoors and at home over the weekend really set the tone, and quickly destroyed a small risk trade that had materialized just after the Japan open. Add to that moves in Australia and New Zealand (first case confirmed there last night), and the passage of time proved a yoke too heavy for risk to bear. New Zealand rates saw aggressive buying of bills and receiving in NZD swaps out to 10y point that was thought to be a large stop out, while Aussie rates saw very good domestic real money buying of 3y (7 bps rally in the bull steepener) and some bank receiving in AUD belly and 10y. Japan meanwhile saw good receiving in JPY 2s, 5s, and 10s. Much of this flow and the chatter surrounding it was predicated on talk of emergency stimulus/cuts on the horizon. You get the theme for today…. Meanwhile, equities across Asia were down between 2.5% and 4.5% with China actually one of the worst performers on the night after having held up better most of this week.

Flows in Asia for US rates saw early Japanese real money selling of US 10s and lifer buying of US 30s, the latter for month end. However as tape bombs began falling closer to Tokyo lunch, there was better Japanese real money selling of US 10s and 30s (month end be damned) to finance buying of JGBs and receiving in JPY swaps. A hedge fund received in USD 10y swaps ahead of the Tokyo lunch, with buying increasing in the second half of the Asian session on the flight bid. Option desks were buyers of TY contracts, received in USD 2y and 5y swaps, and lifted cash 2s and 3s. Asian central banks showed up at the usual time to buy 2s and 3s, but today added a few 5s and 7s for good measure. Ahead of the London open, there was effort by hedge funds to receive in USD 2y swaps against OIS.

Europe only saw more risk off sentiment that climaxed mid-morning. Block buyer of US FVM (2:15 AM ET, +9764 FVM5 for 122-08+, $525K in DV01 in 5s) followed by block buyers of bunds kept US and Euro rates better bid. Continued repricing of peripheral risk (tsk, tsk) continues unabated today, with Italy 12 bps wider to Germany today alone in 10y space, as better bank and dealer buying continues in bobls, bunds, and buxl. There has been very aggressive option-related hedging (read: buying) in ED fronts and reds, FVM futures, and front end of swap curve. RV accounts have been seen adding USD 2s10s flatteners on the swap curve taking advantage of the tightening in 2y space and the steepening in absolute rate levels, while macro accounts have been opportunistically plying 5s30s steepeners in cash space. Since NY arrived, there has been an utter barrage of call ratios and spreads trading in whites and reds of the Eurodollar curve, a block seller of TYM (7054 TYM sold at 134-03+ at 7:35 AM ET, dumping $600K of DV01 in 7y sector), and hedge fund selling of TYM futures outright and on curve against cash 2s before the Chicago pit open.

The only potential relevant data today would be Chicago PMI at 9:45 AM ET and Michigan at 10 AM; by the way, the only risk to this number is risk averse. A strong number will be discounted and a weak number will be interpreted as a sign that US is already slowing. Watch Bullard at 9:15 AM as well, as his topic is “Economy and Monetary Policy”; again, looking for a crack in the Fed’s resolve. You have month end as well today (.13 years in Treasuries, .03 years in UK and .08 years in EU), along with rebalancing numbers of roughly $82BN out of US fixed income into equities after this disastrous end to February and EUR 84BN out of European fixed income into equities as well. End of the day, month end and rebalancing will not matter that much today; that can be addressed another day as there are enough holes in portfolios that it just isn’t relevant right now.

REMEMBER TO MAKE SURE YOUR SCREENS ARE SET TO JUNE FOR CBoT TREASURY FUTURES AS OF TODAY. So with that said, let’s get the range out of the way, and the numbers are predicting a sizable one at that. For choice today in TYM0, call the range at 134-25+ to 133-22+, with overnight range having been 134-20+ to 133-14. Small resistance from overnight comes in at 134-14, the 134-18, then the 134-25+ extension objective for the week (oops), 135-08+. Support comes in at 133-27+, the 133-22+ objective, 133-14, 133-11+, 133-02+, 132-28. IF (big if, but definitely possible) we get a retracement in risk, the upper right will get hit hard by the guys who are already bleeding from the effects of this week and that will be an opportunity to add some gamma, not cheap, but not the highs and living with a scratch is better than bleeding out….

Good luck today, have a great and restful weekend,