another brutal night, but some signs that the coiling may end??? (Tuesday)

And the beat goes on….with even less volume and participation than the last week. While like yesterday, risk on dominates the landscape in trading, today’s difference from yesterday was the lack of real money participation overnight. Where last night we had real money consistently selling Treasuries and paying in USD swaps, that flow has been absent thus far this Balloon Tuesday. Hence volume in barometers such as TY contracts (broke 150K only after 7 AM ET) are at lower end of a Christmas holiday range. Groundhog day all over…. As of 8:20 AM ET, Treasuries are .5 to 1.5 bps lower in yield, marking time ahead of today’s data, while US equity index futures are 1-1.5% firmer ahead of the cash open.

While volume in swaps had held up better than the rest of USD fixed income products, last night was not the case, as even swap trading seemed to slow to a virtual halt. There was the usual Asian bank paying to hedge in USD 5y and 7y swaps, but little else until some deal-related paying in 10y and 30y swaps during the European morning. CTA account was a seller of US classic contracts and TY contracts after the Tokyo open, but just enough to put a cap on rates during the Asian session. There was Japanese real money selling of US 10s to buy the Aussie 2032 TAP last night that took Treasuries to their lows into the Aussie auction. After a good auction, Treasuries drifted higher with some small central bank buying of 5s and 10s, along with a few more mortgages than recently. USD volumes in Europe have remained awful.

The Asian session saw good results for the Australian 2032 TAP, aggressively bid into the event (mostly on the back of the US/AUD switches, attractive plays for Japanese accounts on a x-currency basis); Aussie rates came under a little pressure after the supply. JGBs continued to perform on expectations that the BoJ will be more aggressive in buybacks next week, if for no other reason than to pay lip service to the “unlimited buying” adopted at yesterday’s meeting. Meanwhile, post a holiday on Monday, New Zealand opened well bid today after the performance of JGBs and Aussie rates yesterday, then ground higher on expectations that RBNZ will cut rates further at the next meeting. New Zealand 10s rallied 10 bps, JGBs rates were 1 bps lower in yield, while Aussie 10s were 1.5 bps higher after a fairly solid session. As for equities in Asia, NIKKEI gave back some of its gains from Monday, closing down less than .5% ahead of tomorrow’s holiday, while rest of Asia was largely mixed to slightly firmer for smaller economies.

The European session has seen better statistics for the COVID-19 pandemic that has largely underpinned risk on the continent, pressuring Treasuries and the greenback in a risk on move that has been the theme in Europe. A good UK 10y gilt auction and an even better UK 9y Linker, both sporting high bid/cover and smallish (10y) to no tail (9y L) have underpinned UK rates, while there is massive steepener going through in bund space today. Long end of the curve is under pressure there after Dutch supply, decent amount of hedging for deal-related calendar, and talk of large French syndication that has yet to materialize. Italy led peripherals tighter early but have come back somewhat in the last three hours to trade 4 tighter to core, while rest of peripherals trade 1.5 to 2.5 tighter. European equities are all up slightly more than 1.5% across the continent.

Today in the US, we get Trade Balance data and wholesale inventories at 8:30 AM ET, followed by HPI data at 9 AM ET, wrapping up with Consumer Confidence and Richmond Fed at 10 AM. Don’t see how any of this matters much. Today’s buyback will include roughly $8BN of 0-2.25 year paper at 10:30 AM ET followed by roughly $3BN of 20-30y paper at 11:20 AM ET. The real events of the day will be Treasury’s final issuance of this month, kicking off with $22BN of new 2y FRN paper at 11:30 AM ET and finishing the month with $35BN of new 7y paper at 1 PM ET.

Yesterday’s 2y and 5y auctions were amazingly well-bid and gobbled up by the investor community. Given the month end extension for Treasuries of .13 years (some have .14, let’s not quibble), one would think there will be similar if not greater demand for the 7s today as well. You got only a mild bounce in Treasury market post the supply yesterday, so you still have a nice concession built in for today. We’ll see. Then there was the whole corporate thing yesterday: another stellar Monday that saw 13 deals for over $24BN in issuance. Pretty impressive, and if Europe is any indication, the calendar will grow quickly throughout the day. Then we will get ready for the FOMC and month end extensions. For reference, here they are again: US extends .13 years, MBS extends .05 years, credit extends .2 years, EGBs extend .18 years, and UK extends .09 years.

So what to do in the every shrinking range here? Going out on a limb!!! We will rally to 40 bps in 10s by week’s end. You heard it here, and not just being hopeful. Get this supply out of the way; earnings are coming out for some “dividend payers” that may put the crush to those dividends; month end extensions are huge (and Japan will need to do them before May 1 as they are on holiday all week); and, this coiling is giving off signals of an exit in the next 48 hours. So before getting carried away, still think we could have one more test of the overnight lows, maybe even add a bp or two for concession on the 7s, and then let’s see what happens. I don’t think there is material advantage to trading conditionally, but I would be looking to cover any short on the left-hand side of the grid before today is out. So for choice today in TYM, call the range at 139-00 to 138-15+, after an overnight range of 138-23 to 138-17. Support comes in at the 138-17 low overnight, the objective at 138-15/15+, 138-11+, 138-02 (need to hold or may have the move wrong!), 137-28, 137-22; resistance comes in at 138-24, 138-28+, the 139-00 objective, 139-04+, 139-12, 139-16+.

Have a good Balloon Tuesday and stay well,