Markets breathe easier after a harried eighteen hours, but tensions remain high as we await the response, if any, from President Trump who has indicated he will address the US this morning. After a 12 bps round trip last night in cash 10s as of 8 AM ET, Treasury yields are virtually flat to marginally lower across the curve, while US equity index futures have crawled all the way back to very small positive on the session ahead of the cash open.
There was massive risk off activity across all sectors on the news that ballistic missiles launched from inside Iran had struck two Iraqi bases shared with US personnel and assets; eminis were down 55 handles, 10y yields plunged a quick 11 bps (1.703% low yield at 7:40 PM ET last night), crude rallied an astounding 4.8%, and the dollar came under heavy selling pressure. The height of the risk off came after reports that US watched the ignition sequence on the missiles and still let them launch at the same time the White House released a statement that President Trump would address the nation shortly. The end of the panic was a Twitter statement from Trump that he would not address the nation until the morning. Since that time, 8:15 PM ET, risk has steadied and has edged it’s way back toward flat from Tuesday’s close.
Flows in Asia saw massive buying of cash 5s, FV and TY contracts. There was actually better interest to sell in 2s and 30s from Japanese accounts (2s) and real money accounts (30s, primarily on the curve against TY and 10s). It’s hard to qualify thematic flows on a night like this, but will say that the recent theme of selling TY 130.5 strike (1.69% equivalent 10y cash, low yield from back at the beginning of December), both outright and against buying 130 calls on blocks at 7:08 PM ET (10K 130 calls vs 15K 130.5 calls) and at 7:42 ET (15K x 20K). You are setting up a pretty good short in the 130.5 strike ahead of TYG expiration at the end of the month (24 Jan). The other theme was that while short covering took place in Treasuries and rate futures, there was much better interest to pay especially in USD 5y and 10y swaps. Yields in Japan (-2 bps in 10y), Australia (-3.1 bps), and New Zealand (-5 bps) were dragged lower in the risk off move. Early carnage in Asian equities couldn’t quite get fully reversed like in the US and Europe before they closed, so most bourses were down 1-1.5%.
By the time Europe walked through the door, we were back to focusing on supply and concessions, as RV accounts wasted little time selling bunds against bobls and schatz ahead of 10y bund supply in Germany. Deal-related selling of bobls and buxl were themes ahead of both sovereign and investment-grade supply on the continent, including the anticipated launch of a 100y deal for Land NRW (MS the lead) that has garnered much attention today. The bund auction was technically uncovered, with bunds ticking down on the disappointing results. Markets have gotten much quieter in Europe than during the Asian session. Treasuries have seen some small bank paying in 10s (deal related), RV putting on USD 5s30s steepeners (30y auction tomorrow), and small central bank selling of US 10s. ADP was a beat, but no one cares given the geopolitical situation; don’t be surprised if that is still the case on Friday unfortunately.
With ADP out of the way and officially a non-event (202K vs expected 160K and +57 revision to last month), all we have left is consumer credit at 3 PM ET; at least we get $24BN in reopened 10s at 1 PM ET. Lastly Fed’s Brainard speaks on the Community Reinvestment Act at 10 AM ET.
So, what to do here…still like being long the market coming out of tomorrow’s 30y supply and past all the supply this week. Today will see another deluge of corporates in addition to a couple drive-by sovereigns that popped up late yesterday, not to mention the Treasury reopening in 10s. Let’s just leave it at this: for choice today in TYH, call the range at 129-10 to 128-30 (the overnight range thus far has been 130-06 to 129-02+); it will be interesting see if we end up with a reversal day lower. On the flipside, will point out that it is extremely rare to leave a tail on an extension of the trade like we have last night; technicals say you should go trade the overnight highs again in the near future. For support in TYH, watch 129-02, aforementioned objective at 128-30, 128-23+, 128-21+, 128-14, 128-09; resistance comes in at 129-07+, aforementioned 129-10, 129-15+, 129-17+, 129-26, 130-00+, 130-16. Everyone is tired, had to stay up way too late last night, and nerves are frayed before the year is even a week old.
Be careful out there….
mjc