“active adjusting” was overnight theme ahead of NFP…..(Friday)

Given the All Saints Day Holiday in much of Europe and ahead of the NFP report today, volume and activity were surprisingly brisk overnight. As of 8:15 AM ET, Treasuries are .5 to 1 bp lower, with the 5y part of the curve leading the way for the moment, while equity futures are slightly better ahead of the NFP report and the cash open.

The Asian session saw some early Japanese real money buying of long end as Treasuries wasted little time resuming the flattening trend, with Asian real money a better seller of 10s but volume was relatively light. A strong Chinese Caixin PMI number (51.7 vs expected 51.0) brought out some levered selling in TY contracts and cash 5s, with Asian real money selling 3s after Tokyo lunch. Small receiving in USD 5y swaps turned to better Asian bank paying of same, with RV account adding to 3s30s and 5s30s USD swap flatteners. European trade locally has been quiet given the holiday, with activity more focused on trading/positioning in USD rates ahead of today.

There have been a number of interesting positioning trades that have gone through since midnight in NY:

*40K more risk reversals went through in short jan on block again overnight, but this time it was the 83/88 riskie instead of the 100K 83/87 structure that went through yesterday. Today, client paid .5 bps for the put at 12:25 AM ET.

*Then a short dec 83/85 put ratio went through on block at 12:34 AM ET, client lifting 5K (x 10K) 85 puts for 1 bps.

*Another large futures fly went through on block at 1:39 AM ET (same time as last night, as London was kicking off):
-3K TYZ9 traded 130-07+
-10K FVZ9 traded 119-05.25
-6K TUZ9 traded 107-24+

Today it looks like they bought the fly (+ wings) on the order of $245K in DV01. Seeing people say adding to yesterday’s “buy” but yesterday’s trade of $485K was definitely a sale of the fly, so really looks like taking half the trade off.

*At 2:05 AM ET, there was a block of
-20,000 FVZ9 traded 119-06.75
-40,000 EDM1 traded 98.59
So client bought the FVZ9 on $1MM DV01 on the flattener/swap spread tightener trade.

*Then at 3:45 AM ET on block,
-40K FVF (Jan FV) 118.75/120.5 risk reversal traded 3.5/64, exchanging 50% delta at 119-05+ in FVZ (should be FVH, but…), with client lifting the put.

Finally, as Treasuries bounced, the “sell upside, buy downside protection idea” picked up a bit more on the screen 20K FVZ 119.75 calls sold at 3.5/64s outright, and 30K TY Week 1 (expires today!) from 6/64 up to 7/64 as New York was arriving. Treasuries have crept higher on some short covering in the belly by bank names and a macro account receiving in USD 30y swaps since 7 AM ET, but volumes are still light.

Today brings us NFP and ISM. I think that covers things. And the gag order is lifted on FOMC speakers so we will hear from Kaplan (9:30 AM ET), Clarida (1 PM ET), Quarles (1 PM), Daly (1 PM), and Williams (2:30 PM ET), along with anyone who happens to stop by Bloomberg or CNBC….

So today’s marching orders are a bit different than yesterday’s theme, but the curve keeps flattening and while you can’t feel the pain you can certainly see people getting a bit edgier in their chairs. There is clearly cheap higher rate protection being added but it is all being done with an eye to not getting exposed to a flatter curve, which is leaving this a tricky navigation exercise. Still watching the 131-06+ level in TYZ as THE key level on the upside and 128-21+ on the downside. Small chance of seeing that upside level (good sale first trade just for a trade) and honestly no chance of the downside. So for choice today, let’s call the range at 130-27+ to 129-30+, with the understanding that a strong print will give us a little deeper pullback- and remember that we have had NO concession since the refunding announcement. I think this covers it for now.

Good luck out there and stay warm this weekend,