Markets await the crucial Fed meeting along with Powell press conference later today; as such, volumes have been mediocre at best in a night that saw better to risk, but more about paring a few levered positions and booking profits on risk-off trades from earlier. As of 8 AM ET, Treasuries were bear steepening with 2y yields 2.7 bps higher from their 3 PM marks on Tuesday while US equity indices are small higher ahead of the cash open.

The Asian session saw fixed income rally on the open as there was good buying of JGBs that helped underpin Treasuries for the first hour of trading. Heard of aggressive Japanese real money receiving in JPY 10y and 40y swaps, along with CTA buying on JBU (10y) futures. This helped the long end of the Treasury curve, but from the outset there was much better central bank selling of 2s and 3s in USTs, along with some hedge fund unwinding of TU/TY (2s7s) curve steepeners. After the JGB flurry died down, Treasuries quickly turned south as the selling in the front end continued, pressuring the back end of the curve. There was small Japanese real money selling of US 5s and 10s, both outright and to buy spread product, underpinned by better risk mentality in Asian equity markets and US equity indices. Asian real money was a seller of UST 5s and 7s, with Asian banks only small receiver in USD 5y swaps today. Locally, JGBs rallied 1-4 bps on the curve, with good results from the BoJ buyback in 10-25y sector adding to the bid for JGBs. 5-7y sector and 20-30y sector outperformed on a night that saw very good activity skewed to buying in JGBs. Aussie 10s started better, but a lukewarm reception for a new 10y bond auctioned at record low yields caused Aussie rates to underperform JGBs, but still close 2 bps lower on the session. Asian equities rallied across the board, with China and NIKKEI leading, up over 1.5% (Hang Seng up 2.5%!).

The last bounce for Treasuries this evening occurred on the European open, as CTA account lifted US classic, RV account unwound FV/US steepeners, and UK macro account lifted 10s. But that was it for a bounce, as volumes remained light and better “protective” buying emerged in bunds amid the “risk on/covering” mentality. The theme in Europe was bund put buying and peripheral long-end buying, both of which pressured bunds. A number of 20-35% delta puts on bunds for August and September expirations were bought throughout the evening, pressuring the contract against the backdrop of lighter volume in the underlying. A block buyer of BTPs just after the European open set the tone for European rates, with Italy tightening 4.5 bps to bunds as of 8 AM and rest of peripherals tightening slightly less. A EUR 11BN 27y bund was reopened to unspectacular and uninspiring results, allowing the pressure on core fixed income markets to continue. Meanwhile, Treasury trading largely dried up, with only some “Fed ease” protection being bought (100K front July 98.125 calls lifted on blocks for 1.5 to 1.75 bps), and 3 block trade sales in Treasury futures as the highlights ($850K of DV01 on two FV blocks at 6:18 AM ET and 7:40 AM ET, along with $207K of DV01 on TU block done at 7:37 AM ET). There was some macro flattener (i.e., steepener unwinds done in FV/US, 2s10s on the swap curve, and 2s30s in Treasuries) around mid morning in European session that added to the flattener pressure. European stocks did not get the risk on memo, as they trade largely unchanged to mixed ahead of the US open.

Today’s calendar is devoid of any news or events (unless you are so bored you consider MBA index to be news these days) until the 2 PM ET statement from the Fed and Powell’s press conference at 2:30. So there you go: clean things up and get a good lunch while we wait.

This is the day you have been waiting for!!!! Okay, maybe not if your name is Jerome Powell because there is no way he is going to come out of this day without somebody blaming him for all their problems and their obesity issues to boot. Let’s throw out a couple things. The structural position in the market remains short the front end, short vol (including in the front end!!!-ouch) across asset classes, and slightly overweight, not enough to matter though, in the 7-10y sector. For contrast, let’s throw in that two different groups are claiming CTAs are now max long in US, JGB, European, and UK rate space. We’ll get Stone McCarthy an hour before FOMC, which should show money managers slightly long duration still but not yet at troublesome levels. Don’t be confused: the risk in the market is far from symmetrical and the most pain is to the short vol across asset classes/short front end positioning in fixed income. However, there is room to believe that the knee-jerk (“disappointment”) trade when the Fed doesn’t cut and Powell tries to say they are neutral but watching is to back the market up in a flattener that puts all the structural shorts breathing easier until the world collapses in on them over the next month. I get it’s a pretty complicated scenario, but just think the Fed can’t wave the white flag yet or it could be disaster for the global economy. Just my two cents.

Back to trading, let’s go this way. For choice, call the pre-FOMC range in TYU at 127-17 to 127-02, with likelihood we try to tag 127-02 early before we see some buying mid-morning in a “sneaky” effort to hedge risk by adding a little duration (that always works right?). Post FOMC, the key level on the upside will be 127-23; take that out and it will be moonshot to 123-30 for a trade of 2% in cash 10s. Above there (and if we trade 2% today, we WILL be above there and your stock portfolio will take a pounding today), it’s 128-07+, 128-14 (.382 extension on the last leg up in TYU), and then really nothing until 128-30. On the downside, the key level doesn’t come in until 126-15 in TYU, so there would be a lot of work to do if one is looking to squeeze bad longs, and that would imply a steepener to get it done, which just wouldn’t be sustainable in our eyes. Below 126-15, support comes in at 126-09+, 126-04, 126-02+. If we really break, the big level that makes one reconsider all the drivel above is 124-24+/124-25+.

All right, good luck today, be safe and talk to you after the party….
mjc