another trying day on tap in a rush to safe harbors for investors (Wednesday)

It will be another testy day out there. For now, market trades better risk on in the US, better risk off around the rest of the world. The theme is safety first for investors, looking to protect assets as best possible. Movement out of developing (Asia) into US and peripheral (Europe) into core (read: Germany). It is choppy to say the least again, with good volume throughout the night in actively traded session amid extreme choppy conditions. That will be the case when the minimum tic size in Eminis seemingly becomes 5 handles, as it did for the first 4 hours of the Asian session.

As of 8:30 AM ET, Treasuries are trading flat to 2.5 bps higher in yield in a steepener (see above about safe havens), while US equity index futures trade marginally higher without any conviction.

Japanese real money was two-way in the long end of Treasury curve overnight. That will happen when minimum tic size in eminis becomes 5 handles, as it seemingly was last night! Volume was very solid throughout the night with actively traded and extremely choppy trade. Japanese asset managers were decent buyers in 2s and 3s, while Asian central banks began lifting 2s after Tokyo lunch, continuing to add through the London open.

Treasury options saw active block trading, largely punting of bearish trades that had been entered over the last three weeks. There was early block buying of TYJ 132 calls and later there was block buying of USJ 156 puts (4/64).

There was better selling of Treasuries on block overnight and some of them were silly levels but I guess not surprising given the illiquidity in the market; almost $2.5MM of DV01 in TY and WN overnight sold on blocks. In swaps, there was better hedge fund adding of 5s10s flatteners in Asia and Europe but European real money was better axed to add 10s30s steepeners.

Theme in Europe has been moving out of peripheral and into core. Good selling of Spanish 10s to buy bunds, Italian 5s to buy bobls, French OATs to buy bunds as well. Spreads are blowing out, a bit late, but the right trade.

Into the US open, there was some buying of TYM and USJ gamma along with more central bank buying of 2s and 5s while RV has spent the last hour setting shorts in 5y outright and against 10s in Treasuries ahead of today’s supply.

It is another day of watching tapes. The administration announced an hour ago that President Trump will address the nation at 6 PM ET tonight, with a preview from the president coming right after the announcement when he took a run at the US press for their coverage of the Coronavirus. At 10 AM, we’ll get new home sales, that will largely be ignored. Most important, we will get Treasury auction of $18BN in 2y FRN at 11:30 AM, followed by a dessert of $41BN in new 5y notes at 1 PM ET. After yesterday’s very disappointing 2y auction, it will be interesting to see how investors view the 5y that gives them a bit more duration ahead of month end extensions (Treasurys currently at .12 years, average for a refunding month, but that’s still a lot of duration).

It isn’t a seminal day for the market, but it sure as heck is important. Fixed income in the US clearly taking a back seat to equities and rest of the world for now. You had a classic bear trap yesterday: big move lower on Monday, bounce into retracement zone overnight, and then market fell apart yesterday. You are potentially setting up the same today, although equity futures are trying to give back their gains before the open.

Nothing that is happening in Treasuries today is bearish, and a 3 bps back up is nothing more than a middle-tier headline away from new all-time lows in 10s and 30s. For choice today in TYH, with no conviction whatsoever, call the range at 133-06+ to 132-17 (range overnight has been 133-09 to 132-22+), which would yield us an inside day lower. Support comes in at 132-22+ low thus far, 132-18/17, 132-09+, 132-00+; resistance comes in at 132-30, 133-06+, 133-16+, 133-22+, 133-29+, and then you pick a number…

Good luck out there today…. gonna be another one of them days,