are we seeing the pain in the market??? “structural shorts???” (Wednesday)

Markets are slightly to risk off this morning, but core fixed income markets trade as if we are in the throes of another meltdown. It’s hard to put a finger on a specific driver, but it does seem that all the evidence points to structural shorts being squeezed; the pain is palpable in rate space this morning. As of 8 AM ET, Treasuries are 3.5 to 5 bps lower in yield led by the belly, well off their low yields of the night, while equity futures are marginally lower ahead of the cash open.

The Asian session saw a bid to the dollar and commodity currencies under pressure ahead of RBNZ announcement. There was decent 2-way flow from Asian real money accounts, better to selling 5s and 7s against buying 2s and 3s, that left Treasuries slightly lower early in the session. However, after the Tokyo lunch, Japanese real money accounts began bidding US 10s, while Asian bank started lifting US 3y outright. Japanese bank added steepeners just before the European open. The “big” news during Asia was the pressure on Japanese stocks (small, but it was a quiet night) after local TOPIX stocks went ex-dividend after Tuesday and an RBNZ statement that took the central bank from hawkish to expecting its next move to be a cut. Kiwi rates rallied 10-12 bps, but the NZD 10y swap rate rallied 18 bps (not making that up) on the move. That isn’t repricing; that’s a market that’s offside and potentially telling for the rest of the globe. Asian equities were mixed overnight, with NIKKEI down .23%, Chinese bourses all up between .5 and 1%, and rest of Asian marginally softer.

The market went bid shortly after the European open and has not looked back, with the big move taking place at 5:30 AM ET. Shortly after the European open there was a far more aggressive round of buying by Japanese real money. I don’t know accounting, but sure looks like this was a program to add and maybe these don’t settle until April 1 Tokyo time? If so, makes sense because we have heard for a week how much Japanese accounts did not want to sell Treasuries for year end; they finally did Monday and yesterday, and maybe they grabbed them back last night if they can delay settlement until April 1. Even a block seller of 5000 TYM (for 124-17+, $385K of DV01) at 3:50 AM ET did little to stem the bid. German bund auction tailed one bp, but saw very strong bid/cover and good distribution for the first bund auction at negative yields in over 30 months. Draghi spoke at 4 AM ET, but didn’t say anything new and continued his interesting line about the underlying fundamentals being strong in the domestic economies of the EZ (you see bund yields Mario?). BTPs gapped 10 bps wider to bunds ahead of supply tomorrow and on concerns that the new TLTRO won’t do as much for BTPs as the rest of Europe under the new tiered system. European real money lifted gilts early in the session, RV account sold BTPs to buy OATs (trade for BTP supply tomorrow), macro account bought US 10s to sell bunds before the auction, hedge funds lifted schatz and US 3s. Central bank was a buyer of new US 2s and smaller buyer of US 5s. Treasuries made their highs on a block purchase of $700K in DV01 at 5:46 AM ET (+15,281 FVM9 for 116-10). European stocks are marginally lower, currencies are fairly quiet.

Today’s calendar consists of trade balance data and revisions to IP and CU. For some people, the big event of the day was the release of mortgage apps data that saw a whopping 8.9% jump in apps….108.9 x 0 is still zero I say… Seriously now, the big event for the market will be Treasury’s dual dump of $18 BN 2y FRN at 11:30 AM ET followed by the issuance of $41BN new 5y notes at 1 PM. Later tonight, Esther George will address the Money Marketeers Group in NYC at 7 PM ET. Nothing matters but that supply.

Oh boy, this is quite interesting. Everything seems to argue that the structural short in the market is under the glaring bright light. What else explains good bidding for 2s yesterday some 24 bps through the upper end of the FF boundary followed by good demand, albeit at somewhat more cautious bidding, for a negative yielding bund at auction? With a 5y WI 9 bps below the lower bound of the current FF range, if demand is good for the paper today (2 days before quarter end, mind you!!!), then it has to be the positions. 3y and 5y leading the way tell the same story, oh and every day open interest just keeps going up. Okay, for today’s crap shoot, let’s call the range in TYM at 124-31 to 124-13. The high overnight was that 124-31, which was an objective at the 2.35% level for cash 10s that we tagged. A retest at 124-30/31 seems logical, get through and it will be ugly. Above there, watch 125-03, 125-07+, and 125-11+ (the 2.288% level for cash 10s). If by some miracle we get through 124-13 on the downside, then we can make a run for the overnight low of 124-08+. Below there, support comes in at 124-04+ and the big 123-28 level. If we backed up to 123-28, you have to be adding. Option markets are wide enough to drive a truck through. Just leave it alone for now….

Good luck on this hump day,