another day, another beatdown for the steepener community….oh boy (Wednesday)

The theme continues today, unabated and unrelenting in this crazy new world, as global fixed income trades higher and flatter and higher and flatter. The buying that really materialized yesterday continues into this morning, with the highlight of today’s move being massive receiving program that has gone through in EUR 20- to 30y swaps at 5:30 ET. As of 8:15 AM ET, Treasuries are .5 to 4 bps lower in yield, with 2s30s curve a nice 3.5 bps flatter, 3s30s at 3.2 bps flatter. US equity index futures trade mixed to slightly lower ahead of the cash open in a quiet trade thus far.

Let’s start with a little recap of yesterday, as I have three notes letting me know when circuit breakers kick in for WN and UB (US Ultra and German Buxl) contracts today. The move was painful yesterday, with insurance accounts being the first to step up to the plate yesterday morning, followed by the REIT community in the afternoon. With mortgages seriously lagging in this recent run up, REIT accounts have been forced to become even more dynamic in hedging their portfolios, and it is leaving a mark. There were a number of events cited for yesterday’s flattener: at these levels, insurers/VA types have to get something on, and with negative swap spreads, are turning to Treasuries along with their normal ultra-long swap receiving; 30y yields broke below SPX dividend yield, which perversely forced in some pension types to hedge their negative convexity risks; bid to long end early forced in month end guys who just can’t take the pain any more, especially more prevalent for overseas accounts yesterday; and finally, although there are plenty of other drivers out there that I am sure I have forgotten, massive redemptions and cash flows in UK scheduled for next month are forcing European investors across the pond to lift Treasury duration and receive in swaps. So that gets us to this day we call Wednesday.

So we opened better bid in Asia last night, with US real money account lifting 10s on the Asian open (when was the last time we saw that???), both outright and against 3s on the curve; the long end was marked higher on little to no flow, but Asian real money accounts used the better levels to actually sell 10s, while a hedge fund used the flatter curve to put on 2s10s steepeners post the 2y supply yesterday. RV accounts actually did 5s30s steepeners, which seems very weird given the upcoming Treasury supply in 5s today. Asian banks were better sellers of 5s and paid in USD 5y swaps, with Japanese banks on both sides in 5y and 10y. Treasuries flat-lined from Tokyo lunch through European open, with 10s flat, long end better bid by a bp and front end flat to .5 bps higher in yield. PBoC set yuan at 7.0835 with expectations of 7.1005, but market seems to be less focused on that sector for now, ahead of the next round of Chinese holidays maybe. Locally, Aussie 10y TAP was met with decent bid to cover but less than aggressive pricing, as Aussie 10s rallied 2 bps in a flattener, JGBs rallied 1-1.5 bps led by the 20y sector, and Kiwi rates were flat. Asian equities were tame and mixed, with NIKKEI up .1%, Chinese shares down between .1% and .3%, and rest of Asia mixed.

The European open saw an immediate bid to gilts after the story about the size of next month’s redemptions and coupon payments made its way around London (this is not new!, but I digress), with Treasuries wasting little time joining in the fray. Insurers were aggressive receivers of GBP 20y swaps with RV accounts front running the flows in long end. Of course, the political noise added to the mix as the Betfair odds of a hard Brexit went from 37% yesterday to 49% today after Johnson’s move to suspend Parliament ahead of the Brexit deadline (oh boy again). Data and events took a clear backseat to the flattening move that continued in Europe. At 4:57 AM ET, a large $555K block flattener went through via Treasury futures in 7s30s, with 1533 WNZ9 lifted for 199-08 and 6721 TYZ9 sold at 131-27+. Then at 5:20 ET, a very large EUR swap receiver program kicked off with large lifts by an LDI account in 20y and 30y EUR swaps, about the same time a block buyer went through in BTPs. Little too busy today to get into it, but BTPs are the star again, tightening another 9 bps to bunds today alone. That is a train wreck for another day though (if you care, see how the new coalition is already starting to hit the unpaved surface). Treasuries have seen macro buying of 30s and levered receiving in USD 10y swaps since the buy program kicked off in EUR swaps, while US banks have been better payers in front end, primarily 3y swaps since NY arrived. Long-dated tails trade bid without, just like the underlying at the whiff of a buyer. Risk trades fine, WTI up over 1%, equities mixed, gold unchanged for now, dollar flat. It’s a duration story this week anyhow.

Today’s calendar is empty, unless you care about the MBA refi index, which we actually really don’t. Seriously. Barkin speaks on the economy at 12:20 PM ET, with Daly speaking at an IMF conference at 5:30 PM ET. In between, we’ll get the only events of the day complements of the US Treasury in the form of $18BN 2y FRNs at 11:30 AM ET followed by dessert of $41BN 5y notes at 1 PM. This is a good place to sneak in month end extensions again: Treasuries extend .12 years (avg for Aug is .11, but bigger refunding this month than recent years), credit extends .08 years, MBS extends .05 years, the aggregate extends .08 years. Overseas, Pan-Euro aggregate and Treasury both extend .02 years, Sterling Aggregate and Treasury extend .01 years.

What to do this crazy hump day…. Well, how about stay away from flatteners and shorts in any type of fixed income product for now (call me Captain Obvious). Seriously though, for long term investors with pockets, you can start adding some 3s10s steepeners, but just enough to get started. This is far from done: as a friend pointed out this AM, long tenors in swaptions bid without while exchange underperforms on the constant spread tightening. Crisis situations don’t end this way. You will continue to rally into month end, may get a break Friday/Monday, but it will be short lived. Very hard to take the contrarian position here (there are many getting suffocated right now, and their positions are much bigger than a toe in the water!). Enough, for choice today in TYU9, call the range at 131-20+ to 131-05. 131-19+ is the level we were due from earlier this week, with 131-20+ an extension high off Friday’s breakout. Above there resistance comes in at 130-31, 132-00, 132-08. Support comes in at 131-05 level, 131-03, 130-28+, 130-24, 130-14+, 130-09+ (giving up hope of getting that trade!!). Again, nothing to do conditionally unless it involves unwinding. Stay safe, stay dry, and stay alive….

And have a great hump day,