It has been a fairly tame evening leading up to Tuesday, with some early risk aversion (Chinese/US/Australia stories) but better to risk in the last few hours. Today will be about (global) sovereign and corporate supply along with watching some 5 Fed speakers ahead of Powell tomorrow morning (9 AM ET). As of 8: 15 AM ET, Treasuries are less than a basis point on either side of unchanged and flatter for now, while US equity index futures have shrugged off early weakness to now trade marginally higher ahead of the cash open.
Treasuries started out better to bid in the Asian session on some short covering in USM and deal-related unwinds in 5s and 10s after yesterday’s massive $23.75BN in HG issuance. The short covering turned to better hedge fund buying in 10s and TYM on stories that Trump has no plans to close a Phase 1 deal with China, ironically reference by BoJ’s Kuroda shortly after the story hit the tape. Asian banks used the bid in the belly to pay in USD 5y and 30y swaps, while Asian real money account was seen rolling out the curve via USD 5s10s swap flattener. Block trade in options saw 15K TYM 136.5/138 put spreads rolled into TYN 136.5/138, with the roll being financed by selling TYN 140.5 calls, as the entire package traded at flat (11:52 PM ET). Asian central bank was a buyer of 3s and 5s, while Japanese real money account lifted 10s and mortgages all after Tokyo lunch. US fixed income held a bid right into the European open as US equity index futures traded down over 1%.
During the European session, Treasuries followed core European fixed income lower from the outset of trading as dealers built in concessions for bund supply, London traders struggled with size of Gilt syndication, and corporate calendar grew steadily in the early European trade. Better paying was seen in USD 30y swaps by RV accounts and dealers. Flows in Treasuries have turned fairly quiet since mid-morning in London. European asset managers bought 10s to sell 30s, with some paying in USD 30y swaps as well, while European central bank bought 2s and 3s. Shortly after NY arrived, block buyer of 18,572 TYM for 138-24 (7:43 AM ET), lifting $1.63MM of DV01 in 7y sector, popped Treasury market for a second.
In Asia, Kuroda comments focused on further easing “without hesitation” if needed, talk of increased economic risks of C-19, and tools available to BoJ. JGB 10y auction went extremely well for the second month in a row, 4.09 bid to cover (huge) and only .01 bps tail; long end of JGB curve led rally post the suppy with BoJ buyback scheduled there tomorrow before 20s, 30s, and 40s supply in the next 8 sessions (oh boy). AUD came under pressure and rates found support from China issuing an import ban on some Aussie beef products in retaliation for Australia asking for investigation of C-19 origin. New Zealand rates traded heavier after having outperformed the last several session. JGB 10s closed 1.5 bps lower in yield, Aussie 10s were 1 bp lower, while Kiwi 10s backed up 1.5 bps. Asian stocks were mixed to lower, led by a 1.4% drop in Hang Seng in an otherwise listless trade.
Europe was all about supply. Bunds came under early pressure ahead of the German 7y and Dutch 10y, while 10y syndication in gilts pressured UK rates. There was aggressive RV selling of bunds ahead of the supply; later in the session, same accounts were better buyers of SPG 10s. Early rally for EuroStoxx helped pressure bunds further, with peripherals outperforming. 7y bund supply saw very impressive overbidding, but little pressure to pay up as the issue tailed markedly, while Dutch 10y auction went fine. 25K RXM 171/172 put spreads were bought for 18.5 tics, exchanging delta at 172.96 in RXM. Gilts saw better RV selling early, but caught a bid off large book for the 10y syndication and dovish BoE Broadbent comments that more easing/extra QE may well be necessary. When DMO increased size of auction given book size, gilts took a leg lower on levered selling, but have bounced on short covering since the supply. European stocks are mixed this morning ahead of the US open.
Today’s calendar includes CPI and real earnings at 8:30 AM ET; at least today we are thinking clearly about the data as market is using today’s release as a benchmark for forward inflation readings. At 2 PM ET, we will get the monthly budget statement as well. Fed will conduct regular buyback schedule at usual times, but will also finally begin buying corporate debt ETF’s for today’s trade. More important, we will get second leg of the quarterly refunding at 1 PM ET, with Treasury issuance of $32BN in new 10s. As a warm up to Chairman Powell’s appearance on-line tomorrow, today we will hear from Bullard (10 AM ET), Kashkari (also 10 AM, and he must really be bored, talks a LOT), Harker (11 AM), Quarles (also 11 AM, but this one official as it will be before Senate Banking Cmte), and wrapping up with Mester (6 PM ET, with Q&E).
Take note of the good bidding for German 7y bund and the JGB 10y today; I think it is fair to assume similar appetite for US 10y supply unless we are going to take out .68% in WI 10s (should not happen). Asian accounts have this .70 to .85 zone as their buy area and they have been making room for the paper. Don’t see why it should not go well as of right now. That said, ALREADY have 10 HG deals lined up after yesterday’s eye-popping 10 deals for $23.75BN (thanks Mickey Mouse); it looks to be another record week in what looks to be a record month on the heels of a record month in April. Oh boy. Treasury calendar spreads trading actively, so that will occupy people’s time as well, given everyone will want to be rolled within next two weeks. Yeah, that means distraction from trading the outright market!
Really just want to go home. The rates market is so painful here, devoid of any real trade. Three different tools say we are owed a trade to .55% in 10s here by early next week, but one says .90% first. Oh boy. So, if we get a backup through .80% (like a reauction of supply after tomorrow??), then will look to add synthetic calls by purchasing TYN 25% delta puts (yeah I know, LOVING the idea for way too long, but can’t help ourselves). For now, just sit here and get the daily range wrong every day. On that subject, I have to go find the clue salesman if we don’t trade 140-02 in TYM by beginning of next week, or maybe still need to find the guy anyway…. For choice today in TYM, let’s call the range at 139-04 to 138-16, with an overnight range of 138-29 to 138-19. I know, very bullish again, but that’s what gets kicked out. Don’t get it myself. Will say that if we fail against a test of 138-29+, that 138-16 level may not hold. Support below 138-16 comes in at 138-11+, the old objective at 138-02, the key 137-28 level, 137-22, 137-16, and 137-06+. Resistance comes in at that 138-29+ level, 139-02, 139-04 objective, 139-11+, 139-16+, 139-19, 139-27, 140-02 longer objective (.55% cash 10s equivalent), 140-18.
All right, go have a fun Balloon Tuesday and try to find a reason to actually trade rates today….
mjc